By Cecile Lefort
SYDNEY, May 26 (Reuters) - The New Zealand dollar skidded to a two-month trough on Thursday after dairy giant Fonterra's disappointing milk payout forecast, while the Australian dollar bounced off lows on a modest upgrade to overall spending plans.
The New Zealand dollar NZD=D4 fell to $0.6718, having briefly dropped below 67 cents for the first time since late March. A break would open a retracement to $0.6576.
A broadly stronger pound jumped to its highest since mid-February at NZ$2.1962. GBPNZD=R
Much of the pressure on the kiwi came after Fonterra raised its forecast farmgate milk payout for next season, but by less than expected, marking the third year of low payouts. kiwi got whacked on the somewhat gloomy forecast," said Sean Callow, a senior strategist at Westpac.
The kiwi, which is sensitive to dairy, the nation's top export earner, has skidded more than 3 cents this month, largely on expectations of further easing from the Reserve Bank of New Zealand (RBNZ).
The kiwi found little relief from much better-than-forecast budget numbers in the year to June. government expects to post a NZ$668 million surplus in the year to June 2016 versus its prior forecast for a deficit of NZ$401 million.
Across the Tasman sea, the Australian dollar AUD=D4 was squeezed higher to $0.7210, having recovered from a low of $0.7162 touched earlier in the session. Major resistance was found at $0.7228 with support at a three-month low of $0.7150 set on Wednesday.
The Aussie regained some ground after a mixed capital expenditure report included a slight upgrade to overall spending plans for the year ending June 2017.
"Investment intentions are a little bit better than we had feared and in particular a pick up in services investment intentions is encouraging," said Westpac's Callow.
The report gave a fillip to the Aussie versus its kiwi neighbour. It rose to NZ$1.0715, away from a 3-month low of NZ$1.0610 set on Monday. AUDNZD=R
Sterling inched up to its highest since February to be last at A$2.0400. GBPAUD=R
Australian government bond futures rose, with the three-year bond contract YTTc1 up 1 tick at 98.400. The 10-year contract YTCc1 edged up 2 ticks to 97.7150, while the 20-year contract YXXc1 gained 4.5 ticks to 97.1050.
The premium between Australian AU2YT=RR and U.S. US2YT=RR 2-year cash bond yields grinded lower to 72 basis points, its smallest in 15 years. It was 130 basis points in mid-April. (Editing by Shri Navaratnam)