Eyes on Fonterra; Canada cuts rates; US and Yellen upbeat; China growth meets target; Greece on knife-edge; UST 10yr yield 2.36%; oil and gold fall; NZ$1 = 66 US¢, TWI-5 = 70.8

Here’s my summary of the key issues over night that affect New Zealand, with news of sharp falls in commodity prices, and dairy prices in particular.

Today’s dairy auction has undermined the payout forecasts for the new season and will probably go some way to undermining the confidence levels in the local economy too. Certainly, no one is now talking about a ‘rock-star economy’.

The only saving grace is that the exchange rate is doing its job of providing some stabilisation of the situation.

In US dollar terms, dairy prices fell for the ninth consecutive auction, reaching an average of just US$2,082/tonne. That is the lowest level since June 2009. Don’t forget they were at US$5,042/tonne in February last year.

Overall, prices are down -10.7% from the last auction two weeks ago, down -25% from the beginning of the year, down -42% from this time last year.

In New Zealand dollar terms the falls are not as fierce but they are significant all the same; down -8.7% from the last auction, -12% from the beginning of the year, and -22% from this time last year.

The key Whole Milk Powder price fell a whopping -13.1% from the previous auction.

Banks and policy makers have major decisions on their hands. Dairy farmers have even bigger ones. The rest of us need to take note as well. Everyone will be watching for signals from Fonterra. NZX says the payout should now only be $3.17/kgMS !

Elsewhere there was news as well. Canada cut its policy rate to 0.5% from 0.75%.

Industrial production, prices and confidence all came in positive and better than expectations in the US. Janet Yellen is still talking of rate rises this year.

China’s economy grew an annual 7% in the second quarter, also beating analysts’ forecasts, though its volatile stock markets took a sharp dive again yesterday in a reminder of the threats to their policy and stability.

In Europe, everyone is waiting for the Greek parliamentary vote on the bailout package. It is no sure thing. Their government is splintering before the vote. The unstitching of the deal is a real possibility and markets are nervous. Panic buying is gripping Greece as immediate fears for the future rise.

In New York, the UST 10yr yield benchmark stumbled again after a sharp dip mid-session; it is currently up to 2.36%. Greece is weighing on markets as we speak.

Oil markets are also lower. The US benchmark price is now just above US$51/barrel, and Brent crude is just above US$57/barrel. Stocks of petroleum products are high in the US at present.

The gold price is down again too, sharply so, now at US$1,145/oz.

Following the dairy auction, the Kiwi dollar sank. We are now at 66 US¢, at 89.6 AU¢, and at 60.3 euro cents. The TWI-5 is at 70.8, its lowest level in three years.

If you want to catch up with all the local changes yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here »

Daily exchange rates

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