Yes, this is true. Lower milk prices can unravel NZD/USD carry trade that most investors are in right now. An important component of a successful carry trade is that the asset purchased which is NZD should appreciate against the funding currency. However a slower New Zealand economy coupled with a declining value of a key export which is milk in this case may dampen the market expectation on a RBNZ increasing the interest rates which will result in depreciation of NZD. ANZ advises selling the New Zealand dollar, also known as the kiwi, on any rallies, largely on the declining dairy prices. The bank cut its 2014-15 milk price forecast to around 6 New Zealand dollars ($5.25) per kilogram of milk sold from around 7 New Zealand dollars.
“This change removes nearly 3 billion New Zealand dollars in income from farmers compared to 2013-14, which equates to 1.3 percent of gross domestic product,” Tuck said. Lower farm profitability “quickly starts to eat into discretionary spending.” NZD is buoyant right now and touching its highest level since 2011. Milk is not the only risk to NZD/USD carry trade. In June RBNZ raised the interest rates to 3.25 as compared to almost zero interest rates in US. So there is an outside risk of a sharp correction incase risk appetite soars.
Carry trade is a long term strategy that is popular with many hedge funds and big banks. Carry trade entails buying a currency with high interest rate and selling a currency with lower interest rate. The interest rate differential for the carry trade is positive so the trader earns interest rate on daily basis. If the currency bought also appreciates this increases the profit margin for the trader. Did you read this post on an Ex-Goldman Sachs trader who thinks that $8 million bonus is not enough for him? Now you can stack your positions when you plan a carry trade. This will help in exploding your profits. NZD/USD is a popular pair. Many traders love to trade this NZD/USD pair. When you trade NZD/USD keep an eye on the New Zealand economy.