Future pricing currently suggests a rise for whole milk powder of more than 10%, ASB chief economist Nick Tuffley said yesterday.
Markets continued to factor in the likelihood New Zealand production would fall this season compared to last.
Also, New Zealand dairy prices were relatively low compared to United States or European prices.
Craigs Investment Partners broker Chris Timms said headline dairy prices had bounced 27% over the last two auctions.
Whole milk powder prices were now $US2078 ($NZ3284) a tonne and needed to rise to $US2200 for Fonterra to be able to deliver its $3.85 per kilogram of milksolids forecast milk price for the season.
''Farmers will be watching this week's auction in the hope the improvements during the last two auctions have been sustained.''
However, the key event this week would be the Federal Reserve meeting in the United States, he said.
The two-day meeting took place on September 16 and 17, which in New Zealand was Wednesday and Thursday.
The meeting ended with a statement, due for release at 6am on Thursday, followed by a press conference with Fed chairwoman Janet Yellen.
The US central bank had held its key interest rate - equivalent to New Zealand's official cash rate - at zero for the past nine years.
As the US economy recovered, the Fed was giving consideration to increasing interest rates from those low levels, Mr Timms said.
The first move towards more ''normal'' interest rate settings was expected to come within the next six months so this week's meeting would be watched closely.
If the Fed lifted rates, the US dollar would rise, commodity prices would weaken, emerging market economies would face greater pressure and the chance of the Reserve Bank of New Zealand pausing its interest rate cuts would increase, he said.
''If they do nothing, we will likely see the opposite occur, along with equity markets getting a boost.''
There were several reasons why the Fed should take action this week but it probably would not, Mr Timms said.
The market was pricing in a 28% probability of a rate hike in September and the likelihood was rising to 59% for the December meeting.
