• Breach of support near NZ$1.09 seen pivotal: Credit Suisse
  • Kiwi net shorts almost vanishing; Aussie shorts remain

Australia’s dollar looks to be headed back down against New Zealand’s after the Aussie-kiwi topped out near its highest level in two years.

The currency is set to drop against New Zealand’s as a more than 60 percent rebound in dairy prices supports the kiwi, in contrast to Australia’s vulnerability as demand weakens for its key exports of iron ore and coal. Credit Suisse Group AG also says trading patterns suggest further declines for the Aussie after it fell below pivotal support at a “neckline” around NZ$1.0915 and the 38.2 percent retracement of its rally from the April record-low of NZ$1.0021 to a July high of NZ$1.1430. The Aussie was at NZ$1.0941 as of 9 a.m. Sydney time Wednesday.

“This turns the immediate risk on the downside and we look for a sustained break below here which should then confirm the completion of a larger bearish top,” David Sneddon, Christopher Hine and James Lim at the Swiss bank wrote in an Oct. 5 report. There is further scope for the pair to test the 61.8 percent retracement of the April-July advance at about NZ$1.0562, they said. “A direct capitulation below it can see further weakness to the measured target at NZ$1.0398 ahead of NZ$1.0339.”

Speculators have almost eliminated shorts on the kiwi even as they maintain bets on declines in the Aussie, with swaps markets showing expectations that New Zealand is close to completing a cycle of interest-rate cuts while Australia’s central bank will be forced to resume easing in the coming months.

Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, raised its forecast milk payout to New Zealand farmers more than economists expected and said full-year earnings increased. Dairy prices climbed 9.9 percent at Fonterra’s latest auction, held early Wednesday Wellington time, and have now surged 63 percent since reaching a 12-year low in August, according to the GlobalDairy Trade price index. Demand started to recover after Fonterra reduced the amount it sells at auction on waning milk production.

Bloomberg’s index of global commodities prices has recovered a mere 6 percent from its 2015 nadir that was also reached in August.

“The Australian dollar will remain a sell until we see a clear rebound in global commodity prices,” said Masafumi Yamamoto, senior strategist at Monex Inc. in Tokyo. “On the other hand, it’s hard to shorten the Kiwi if you look at a sharp rebound in milk prices. A logical conclusion is that the Aussie will be weaker relative to the kiwi.”

Yamamoto said expectations for additional easing by the Reserve Bank of Australia will also keep the Aussie pressured, while current kiwi levels have already priced in more easing. “The Aussie may fall to NZ$1.06 before the end of the year,” Yamamoto said.

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