SYDNEY/WELLINGTON: The New Zealand dollar was hammered on Monday after the country's biggest exporter dairy giant Fonterra disclosed during the weekend that a bacteria that can cause botulism was found in some of its dairy products.
The Aussie dollar had problems of its own, plumbing three-year lows after disappointing domestic data reinforced expectations of further rate cuts by the Reserve Bank of Australia (RBA).
The kiwi slumped as much as 2 percent to a one-year low of $0.7670, after some of Fonterra products were banned in China and Russia and off shelves in some Asian markets. It found strong support around $0.7680/90 and pared its losses to stand at $0.7740.
"Markets' shoot-first-and-ask-questions-later response looks entirely appropriate as investors factor in the risk of NZ's milk powder exports taking a decent hit," said Mike Jones, a BNZ currency strategist.
Greg Gibbs, a strategist at Royal Bank of Scotland in Singapore, expects the kiwi dollar to remain under pressure this week but does not think the Fonterra impact will be long-lasting.
"The issue doesn't look like it is wide-spread, it's more an issue of public relations for Fonterra now," he said.
Long the darling of currency speculators, the kiwi started falling out of favour recently, with the market adopting net short positions from late June onwards.
It has lost nine cents since its April peak.
Near-term support for the kiwi was seen at $0.7700 and below that the session low of $0.7670, with resistance at $0.7800.
The dairy scare knocked the kiwi across the board, notably against its Australian cousin, which leapt 1.7 percent at one stage to a near one-week high of NZ$1.1547. It was last at NZ$1.1426, a fair way from last week's five-year trough of NZ$1.1196.
On a trade-weighted basis, the New Zealand dollar was down 1 percent.
In Australia, the Aussie slipped to $0.8848, its lowest since 2010, after option barriers were knocked out on weaker-than-expected retail sales.
It last traded at $0.8863, showing a loss of 0.5 percent on the day.
Major support is seen around $0.8800, the 76.4 percent retracement of the 2008-2011 climb, with resistance at $0.8870.
The Aussie slipped nearly 4 percent last week, its largest loss in two years, after dovish remarks by the Reserve Bank of Australia (RBA) prompted markets to not only price in a cut in interest rates next week, but a second easing before year-end.
Swap rates now imply a 91 percent chance that rates will fall to a record low of 2.50 percent at the RBA's policy meeting on Tuesday.
Markets pricing implies a second easing before year-end, seeing interbank rates at 2.20 percent in December.
Australian government bond futures bounced with the three-year bond contract up 15 ticks to reach eight-week highs at 97.530, nearing a key retracement level at 97.561. Likewise, the 10-year contract jumped 18 ticks to 96.380.
The market outperformed Treasuries, shrinking the premium on 10-year yields to 100 basis points, lows not seen since mid-2007.
New Zealand government bond prices traded higher, sending yields 8.5 basis points lower along the curve.
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