SYDNEY/WELLINGTON, May 15 (Reuters) - The New Zealand dollar dropped on Friday after dairy giant Fonterra surprised markets by revising down its supply forecast, dragging the Australian dollar lower.
The New Zealand dollar slipped to $0.7474, having touched a one-week high of $0.7564 on Thursday, while the Australian dollar eased to $0.8060, from $0.8084 in early trade.
"The Aussie and Kiwi dollars gapped lower by some 45-50 pips as New Zealand's dairy giant Fonterra announced a massive cut on its production forecast, said Stephen Innes, a senior trader at FX/CFD firm OANDA Australia and Asia Pacific.
For Fonterra's announcement, see here%20Announcement%2015%20May.pdf?1431650156
The kiwi is sensitive to news on dairy which is New Zealand's largest export earner. The local currency had already come under pressure on speculation the Reserve Bank of New Zealand (RBNZ) may cut interest rates in coming months.
Markets give a 38 percent chance that the RBNZ may cut interest rates by 25 basis points to 3.25 percent in June .
The kiwi was on track to post a drop of 0.3 percent for the week, which if sustained would be its fourth consecutive period of losses.
Any indications of slowing growth and easing inflation could see a retracement all the way to $0.7200. Near-term upside in the kiwi may be capped around $0.7520-$0.7530, which roughly contain its 55-day moving average and the 50 percent retracement of its sell-off since the end of April.
Broad kiwi weakness kept the Aussie well below a four-month peak of $0.8164 touched on Thursday. Dealers said recent gains have prompted investors to book profits. Support was found around $0.8000 and resistance at $0.8051.
The Aussie was still on track for a gain of 1.5 percent this week. If sustained, it would be the sixth consecutive week of gains and represent the longest streak since 2012. Much of the strength is due to diverging interest rate outlook expectations in the United States and Australia.
While investors have pushed back the likely lift-off date for a rate hike by the Federal Reserve, they have widened the odds of more easing by the Reserve Bank of Australia after last week's cut to a record low of 2.0 percent.
The Aussie kept hefty gains versus the yen at 96.18, having popped above 97 cents on Thursday. It was up 1.3 percent so far this week.
New Zealand government bonds were largely flat.
Australian government bond futures pulled further away from recent lows, with the three-year bond contract up 5 ticks at 97.910. The 10-year contract added 6 ticks to 97.3250. (Editing by Shri Navaratnam)