"The NZD has largely ignored the precipitous decline in dairy prices, instead choosing to focus on NZ’s interest rate advantage. Simply put, carry remains king. On a risk-adjusted basis, the return from a USD-funded carry trade into NZD continues to improve. This will not change until we see some movement towards pricing in US Fed Funds hikes in H1 2015 or a lift in volatility. We’re not counting on either to happen much before September. The Fed is due to update its staff projections then, and with inflation already in the middle of the 1.4% to 1.6% band expected by end-2014, the risks are skewed toward a forecast upgrade for inflation and (one would expect) interest rates. We remain optimistic that will prompt a re-assessment of where NZD should be. Significantly lower, in our view. We see NZD/USD at 0.80 by year-end.
(At Fonterra’s latest GlobalDairyTrade auction, milk prices fell by 4.9%, taking the cumulative decline since February to 29%.) "