By Cecile Lefort
SYDNEY, Aug 5 (Reuters) - The New Zealand dollar fell to one-year lows on Monday after China banned the import of some milk products from New Zealand, hitting dairy giant Fonterra , the country's biggest exporter, and sending investors scurrying for bonds.
The kiwi slumped as much as 2 percent to $0.7670, its weakest since June last year, after key importer China halted the import of some dairy products from New Zealand because botulism-causing bacteria were found in some of Fonterra's raw materials.
The kiwi found strong support around $0.7680/90 and pared its losses to stand at $0.7790, 0.5 percent lower since Friday.
'As dairy products account for around 25 percent of New Zealand's goods exports and around 5 percent of its GDP, these developments present a significant downside risk for New Zealand's economy, with likely downside implications for the currency,' said Paul Bloxham, Australia and New Zealand's chief economist at HSBC in Sydney.
The currency risk supported New Zealand government bonds, which had already made gains the wake of disappointing U.S. jobs numbers. Yields fell as much as 10 basis points at the long end of the curve.
Long the darling of currency speculators, the kiwi has been 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, a move welcomed by the Reserve Bank of New Zealand (RBNZ) which has been fretting over a high currency.
Still, the kiwi remained strong by historical standards having averaged around 61 cents over the 2000-2010 decade.
The currency's strength has been partly due to market expectations the RBNZ will have to hike interest rates in coming
months to help cool an overheating housing sector. A tightening would make the country a rarity among developed nations, leading some analysts to doubt the currency will fall too far.
'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.
'However, given the tendency for the exchange rate to overreact to these sorts of news events, we expect to see a bounce at some point.'
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 and it was notably lower against its Australian cousin, which leapt 1.7 percent at one stage to NZ$1.1547. It was last at NZ$1.1414 , a fair way from last week's five-year trough of NZ$1.1196.
(Editing by Eric Meijer) Keywords: MARKETS NEWZEALAND/
(Cecile.Lefort@thomsonreuters.com)(+61 2 9373-1234)(Reuters Messaging: firstname.lastname@example.org)
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