NZ Retail Sales (DEC) (21:45 GMT; 16:45 EST)
Expected: 0.1%
Previous: 2.0%

Retail Sales Ex. Inflation (QoQ) (4Q) (21:45 GMT; 16:45 EST)
Expected: 0.6%
Previous: 0.2%

What Are The Markets Facing?

Retail sales in New Zealand are expected to have slowed in December, as higher energy and food prices limit disposable income while aggressive policy tightening by the Reserve Bank of New Zealand over the course of 2007 has its intended effect: to cool the economy. Indeed, credit card spending in the country – which has served as a good leading indicator of retail sales over the past few months – slowed during December to an annual rate of 7.6 percent from 9.5 percent. However, retail sales are anticipated to have picked up overall over the course of the fourth quarter at a rate of 0.6 percent, which will support the persistently hawkish bias of the RBNZ. Similar to the Reserve Bank of Australia – which raised rates last week to an 11-year high of 7.00 percent – inflation pressures remain a major issue as the two regions. During the fourth quarter, consumer prices jumped above the RBNZ’s 1-3 percent comfort zone to 3.2 percent from a year earlier. Furthermore, RBNZ Governor Alan Bollard said in December that rising gas and food costs may keep inflation above target until mid-2009. However, with the downside risks to growth looming large, the central bank is highly unlikely to even consider raising interest rates. Instead, strong price pressures will prevent the RBNZ from following the lead of the Federal Reserve, Bank of England, and Bank of Canada by cutting rates. Traders are already betting that the RBNZ will remain neutral, and if retail sales prove to be better-than-expected, speculation will mount that the central bank may become increasingly hawkish.

Bonds – 10-Year New Zealand Government Bonds

New Zealand’s government bond yields have steadily climbed in recent weeks as economic data suggests that the RBNZ will maintain their hawkish bias and refrain from cutting rates like the Federal Reserve or Bank of England. However, the 6.40 percent level has thus far prevented yields from climbing any higher, but if upcoming retail sales figures prove to be better-than-expected, this may no longer be the case as yields may break above. On the other hand, a disappointing reading could bring yields back down towards trendline support near 6.25 percent.

FX – NZD/USD

The NZD/USD pair continues to consolidate in the 0.7800 – 0.7950 region, as the economies of the Asia-Pacific region, including New Zealand and Australia, have been relatively insulated from the credit crunch plaguing the US and Europe. However, given record high RBNZ interest rates and rising fuel and food prices, New Zealand consumer spending is expected to decline in December A Bloomberg news survey of 11 economists reveals consensus expectations for a mild 0.1 percent increase in retail sales. However, the quarterly rate of retail sales growth is forecasted to accelerate and with the RBNZ still maintaining a hawkish posture, the news will little to convince the markets that the central bank has any plans to cut rates in the near-term. As a result, a stronger-than-expected reading of any of the retail sales reports (monthly or quarterly), could help initiate a break higher in the NZD/USD pair towards the 0.8000 level, with sharp gains targeting the multi-decade highs near 0.8100. On the other hand, a particularly disappointing reading could weigh NZD/USD down towards 0.7800 once again.


Equities – NZX 50 FF Index

Equity markets in New Zealand have been hit particularly hard hit in recent weeks, and while the 200 SMA near 3,500 has prevented the NZX 50 from plunging further, the trend is clearly to the downside. Nevertheless, global equity markets have stabilized somewhat, which may allow gains in New Zealand’s stock index in the near-term. Upcoming event risk will be in the form of New Zealand retail sales for the month of December and the fourth quarter. If the news is better-than-expected, equity market sentiment may improve domestically as traders judge that the economy is not in free-fall mode after the RBNZ enacted multiple rate hikes in 2007 to being the overnight cash rate to a record high of 8.25 percent. On the other hand, disappointing spending reports could weigh on the index to bring price down towards 3,500, with sharp declines targeting the August 2006 low of 3,415.

Terri Belkas is a Currency Strategist at FXCM.