New Zealand 10-year bond yield near 2-year low after Fonterra lowers milk price forecast; RBNZ's dovish statement still weighs

New Zealand 10-year bond yield closed near 2-year low on Friday after Fonterra lowered its milk price forecast for 2017-18, remaining soft on fiscal earnings as well. Also, yesterday, the Reserve Bank of New Zealand (RBNZ) remained on hold at its monetary policy meeting, while delivering a dovish tilt to its statement.

The central bank reiterated that the Official Cash Rate (OCR) will remain low for a long period of time, and that the next move could be up or down.

At the time of closing, the yield on the benchmark 10-year note, which moves inversely to its price, plunged 9 basis points to 2.61 percent, the yield on the long-term 20-year note slipped 1 basis point to 2.93 percent and the yield on short-term 2-year also closed nearly 1 basis point lower at 1.71 percent.

Fonterra today announced a cut to its 2017/18 farm gate milk price forecast by 5 cents to $6.70. Earnings per share are now expected to be at or below the previously announced 25-30 cent range with a 10 cent dividend (which has already been paid as an interim dividend). Usually, farmers receive two dividend payments, and may have been anticipating a dividend of around 15-20 cents for the 2017/18 season, Westpac Research reported.

The RBNZ has (finally) accepted the reality that the economy has slowed this year. Consequently, they have become more dovish on the OCR outlook. Consequently, they have pushed out the expected date for OCR hikes, Westpac Research reported.

"We now see a risk that the OCR starts rising even later than our long-held forecast of late 2019," the report added.

Meanwhile, the NZX 50 index closed 0.79 percent higher at 9,010.61, while at 06:00GMT, the FxWirePro's Hourly NZD Strength Index remained slightly bearish at -83.24 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex