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NZD/Dairy Correlation — Not That Simple

January 23, 2017 by Andriy Moraru

In early 2008, when the global financial crisis started crippling the world economy, the New Zealand economy entered into recession. Correspondingly, for the most part of 2008, the Kiwi dollar remained on a declining note against the greenback.  The New Zealand dollar is categorized as a commodity currency, along with its Australian and Canadian counterparts. While Australia is rich in raw materials, such as iron ore and coking coal, Canada owns the world’s third-largest oil reserves, albeit in the form of oil sands. New Zealand is blessed with abundant natural resources suitable for dairy farming, and the country continues to make optimum use of it. The quantum of dairy products shipped out of the country has grown steadily over the past two decades. In the first half of 2016, the dairy products contributed about 18% of the total export revenue of the country; the number reached its high of 26% in 2012. Naturally, the price of dairy products yields considerable influence on the exchange rate of the Kiwi dollar. This article examines the correlation between the dairy product prices and the New Zealand dollar from the Forex trader’s point of view.

Brief introduction to New Zealand’s dairy industry

Until the 1980s, New Zealand farmers were mainly involved in raising sheep and beef cattle. As dairy farming turned more profitable when compared to other land uses, the farmers shifted to it. Farmers ship their products through dairy co-operatives. The operations of a dairy co-operative can be virtually divided into two main sections: trading milk and advisory. Milk trading section usually takes care of receiving milk from producers, performing quality tests, processing, storage, local and cross-border marketing, payment to farmers, and accounts keeping. Advisory section provides breeding related advises, ensures quality fodder and cattle feed, and oversees cattle health coverage.

In the early 1900s, there were as many as 500 dairy co-operatives in New Zealand. Better transportation and processing facilities led to mergers and consolidation in the industry. By the late 1990s, the number of dairy co-operatives decreased to four, namely, the New Zealand Dairy Group (NZDG), Kiwi Co-operative Dairies (KCD), Westland Milk Products, and Tatua Co-operative Dairy Company.

In 2001, the NZDG and KCD merged together with the New Zealand Dairy Board to establish Fonterra, which now has a nearly complete control over the New Zealand dairy farming and export industry. Fonterra accounts for a quarter of the global dairy product volumes.

To ensure transparent price discovery mechanism, in 2008, US-based Charles River Associates established Global Dairy Trade (GDT) for Fonterra. The GDT is a semimonthly online auction platform for unbranded dairy products, including whole milk powder, butter, and lactose. The GDT operates independently. As of today, GDT is a destination for 700 qualified bidders from 90 countries. Thus, it acts as the global price benchmark for dairy products. About 95% of dairy products produced in New Zealand are exported. So, an increase or decrease in the GDT Price Index ultimately affects the exchange rate of the New Zealand dollar.

Dairy prices and NZD exchange rate

The chart below shows the correlation between the New Zealand dollar and the GDT Price Index from January 1999 through January 2017:

NZD/USD Correlation with GDT Price Index on Monthly Chart Between 1999 and 2017

Based on the relationship between the dairy prices and the New Zealand dollar, the above chart can be virtually divided into three slices:

  • 1999–2005. During this period, the New Zealand dollar has a negative correlation with the GDT index, i.e. when the Kiwi currency goes up, the dairy prices are down and vice-versa.
  • 2005–2013. During this period, the New Zealand dollar moves along with the rise or fall in the GDT index.
  • 2013–2017. The dairy prices have taken a lead in 2013. A rise in the price of dairy products is soon followed by an appreciation in the exchange rate of the New Zealand dollar against the US dollar.

Now, to understand why the correlation between the price of dairy products (or GDT index as a whole) and the New Zealand dollar has changed over the past two decades, we should first of all have a clear idea of the demand profile of the dairy products. This will enable us to decipher the reason behind the rise or fall in the dairy prices and also its subsequent impact on the Kiwi. Furthermore, a clear understanding of the demand profile will enable a Forex trader to assess the future demand/supply situation and to forecast the currency’s trend with reasonable accuracy.

Major importers of NZ dairy products

The chart below illustrates the rise of China as the major consumer of dairy products in the past two decades.  From a mere NZ$11.45 million worth dairy products imports in 2000, Chinese imports have risen to $2.5 billion in 2015. China’s dairy product imports from New Zealand peaked at NZ$4.6 billion in 2013.

New Zealand's Dairy Exports per Country, Billions of $NZ

The opposite is true in the case of the United Kingdom. Being a part of the European Union, the UK continued to fulfill its demands by increasing its purchases from the countries in the mainland Europe. This explains why the UK’s share of imports from New Zealand has declined considerably over a period of time. Notably, the European Union would be the largest exporter of dairy products if it were a single country.

Between 1999 and 2003, the main export product of New Zealand was sheep and cattle meat. Thus, the price of dairy products had little influence over the exchange rate of the New Zealand dollar. The negative correlation during that period is clearly explained by the fact that the GDT Price Index is denominated in USD. With a lack of direct influence of the dairy prices on the New Zealand’s currency, the lower NZD/USD rate would result in a similarly higher GDT index and vice-versa.

However, the steady increase in demand for dairy products from China, United Arab Emirates, and Saudi Arabia made New Zealand a powerhouse of dairy product exports. The signing of free trade agreement with China bolstered the price and volume of dairy products shipped out of New Zealand. Imports into China began to influence the price of dairy products after 2003. This was a period when China was recording double-digit GDP growth. Nearly 65% of the New Zealand’s dairy exports were reaching the shores of China. Thus, a rise or fall in the demand of dairy products from China began to influence the price of dairy products. By this time, dairy products have also become the major export revenue earner of New Zealand. Thus, any increase or decrease in the price of dairy products began to affect the exchange rate of the New Zealand dollar. Higher prices for milk products created immediate higher demand for NZD, which translated into high positive correlation between the GDT Price Index and the NZD/USD currency pair.

NZD’s rise as the king of carry trade

In the aftermath of the financial crisis in 2008, central banks across the world slashed interest rates to flush the market with money and spur growth. By 2013, New Zealand was one of the few developed countries with AAA credit rating to offer high interest rate — 2.5% at that time. The interest rate was 0.25% in the USA and the eurozone that year. The higher interest rates attracted the investors and speculators who were looking for a high-yielding, yet safe, asset. Ultimately, this made the Kiwi dollar an uncrowned king of carry trade currencies.

A decline in the price of dairy products was unable to push the New Zealand dollar downwards because of the demand from investors and speculators who used every dip to buy the currency. This was probably one of the prime reasons for the lag that developed between the GDT index movement and the New Zealand dollar.

The booming housing market and large inflow of tourists also kept the New Zealand dollar strong enough to resist the impact of dairy product prices.

GDT vs. other New Zealand dollar currency pairs

Until now, we studied the correlation between the GDT Price Index and the NZD/USD pair. How about other NZD based pairs? To assess whether the correlation between the GDT index and the New Zealand dollar is influenced by the second currency in a NZD based pair, let us study the most commonly traded ones.


The chart below illustrates the relationship of AUD/NZD pair with GDT Price Index:

AUD/NZD Correlation with GDT Price Index on Monthly Chart Between 1999 and 2017Between 1999 and April 2004, the AUD/NZD pair moved in tandem with the GDT index. The situation changed in the second half of 2004 when the AUD/NZD pair began exhibiting a negative correlation. This was also the period when New Zealand’s dairy exports to China increased at a formidable pace. The 2008 financial crisis eroded the value of the New Zealand dollar. Thus, a rise in the volumes and price of the dairy products did not have considerable influence on the New Zealand dollar. So, the AUD/NZD pair and GDT index once again began moving in tandem. In May 2012, the Reserve Bank of Australia slashed interest rates by 50 basis points to 3.75%. Analysts were expecting only a 25 basis points cut. The overwhelmingly negative news weakened the Aussie against its rivals. Thus, from May 2012 onward, the AUD/NZD pair began exhibiting negative correlation with the GDT index. The rise of the New Zealand dollar as a favorite carry trade currency among investors also aided the negative correlation.

Now, let’s look at three other popular pairs (NZD/CAD, NZD/JPY, and NZD/CHF) to assess whether any other currency has any effect on the overall correlation.

In the pairs taken for study, the Canadian dollar is a commodity currency, whereas the yen and franc are regarded as safe haven currencies. The safe haven currencies and commodity currencies usually exhibit a lot of volatility during periods of global uncertainty. This was the main reason for selecting these popular high volume pairs for the study.

The correlation of both NZD/CAD and NZD/JPY pairs with the GDT Price Index is similar to the correlation between the NZD/USD pair and the GDT Price Index.


NZD/CAD Correlation with GDT Price Index on Monthly Chart Between 1999 and 2017


NZD/JPY Correlation with GDT Price Index on Monthly Chart Between 1999 and 2017


However, as shown below, the correlation between the NZD/CHF pair and the GDT Price Index is quite different from the others in the period ranging from June 2010 to 2015.

NZD/CHF Correlation with GDT Price Index on Monthly Chart Between 1999 and 2017

The NZD/CHF pair began exhibiting negative correlation with the GDT index starting from June 2010. The Swiss National Bank (SNB) officially began intervening in the market in March 2009. However, the SNB abandoned the intervention strategy in June 2010, after the maneuver failed to yield the necessary results.  This strengthened the Swiss Franc against all the currencies including the New Zealand dollar, in spite of a rise in the dairy prices. The SNB once again started intervention in the market in the second half of 2011, after losing nearly CHF10 billion earlier that year. The established exchange rate limit helped the NZD/CHF pair to move in line with the rise and fall of the GDT index between December 2012 and February 2013. However, the demand for the Swiss franc became so high that even intervention and negative interest rates did not work as intended. Thus, a rise in the dairy prices during that period did not have any positive effect on the New Zealand currency. The correlation restored after SNB had removed its EUR/CHF cap policy in January 2015.

NZ interest rates vs. NZD/CHF

It would be interesting to see how much of an impact does the benchmark interest rate have on the Kiwi dollar. Let us take the NZD/JPY pair for study purposes. The orange line in the chart below is the interest rate changes, while the red line is the GDT index.

NZD/CHF Correlation with GDT Price Index and Interest Rates on Monthly Chart Between 1999 and 2017

The following can be inferred from the above chart:

  1. When interest rates and dairy prices go up together (September 2002 — August 2006), the New Zealand dollar strengthens quickly, i.e., there is a high positive correlation. The opposite is also true.
  2. When interest rates stay more or less flat (2009–2011), and the dairy prices rise, the New Zealand dollar tends to move in tandem with the dairy prices.
  3. When interest rates rise and the dairy prices fall (2014–2015), the New Zealand dollar follows the interest rates in the short-term and the GDT index movement in the medium-term.

To put it otherwise, short-term volatility is an outcome of interest rate changes while medium-term price movements are heavily impacted by gains or losses in the GDT index reading. This can be explained by the fact that dairy exports form the backbone of the economy. So, ultimately, the dairy prices decide the trend of the Kiwi dollar.

GDT Price Index and Commitments of Traders

Now, let us examine how market participants respond to changes in the GDT Price Index in the derivatives market. For this purpose, you can look at the chart below with the Commitment of Traders report (CoT) difference of non-commercial long and short positions in NZD futures plotted along with the GDT Price Index and the NZD/USD spot exchange rate beginning from 1999. Unfortunately, the CoT data before 2006 is very scarce hence unreliable. The red line is GDT index; the blue one is CoT data:

NZD/CHF Correlation with GDT Price Index and Commitments of Traders Data on Monthly Chart Between 1999 and 2017

The chart indicates that smart money moves well ahead of the GDT index in anticipation of a rise or fall in the dairy prices. This is mainly because major funds are equipped with up-to-date information regarding the shipping data from major ports. By tracking the demand and supply, they are able to decide where the prices would be heading in the future. Furthermore, this enables smart money to get in and get out before retail investors.


The exchange rate of the New Zealand dollar is affected by both interest rate decisions and changes in the GDT Price Index reading. During the last few years, the short-term trend is basically an outcome of interest rate decisions, while the medium-term trend is decided by the dairy prices which ultimately shape the economy of New Zealand. Currency traders can further amend their toolkit with the Commitment of Traders report data to track the positions of big speculators in NZD futures. Long-term trading decisions involving the New Zealand dollar should be made only after taking this information into consideration.

If you have some interesting notes or questions about the New Zealand dollar and its relationship with the global dairy market, you can post them using the commentary form below.

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