What Are The Markets Facing?

Retail sales in New Zealand are expected to have eased back slightly in May, weighed down by autos as rocketing gasoline prices deter buyers. Excluding this factor, however, retail sales are anticipated to rebound 0.5 percent, as higher energy and food prices boost the index reading. However, spending on discretionary items like clothing and furniture could be weak, as credit card spending in the country – which has served as a good leading indicator of retail sales over the past few months – slowed to an annual rate of 5.9 percent from 8.2 percent. If retail spending in New Zealand slows, the move will be in line with the Reserve Bank of New Zealand’s plans, as they have left rates steady at a record high of 8.25 percent despite the fact the economy contracted during the first quarter. While the RBNZ undoubtedly remains concerned about inflation pressures, the monetary policy statement from their June meeting said that they were “likely to be in a position to lower the OCR later this year, which is sooner than previously envisaged.” As a result, it would take an extremely strong retail sales report to shift expectations that the RBNZ will cut rates this year, and given the softer credit card spending figures, there is downside risk for this upcoming report.

Bonds – 10-Year New Zealand Government Bond Yields

New Zealand’s government bond yields have steadily tumbled since breaking below support at 6.3 percent, and looking ahead, the release of retail sales could shake up bonds, especially if the data reflects surprising results. A disappointing spending number will raise the risk that the RBNZ will consider rate cuts this year and lead yields toward 6.0 percent, while a better-than-expected figure could help propel yields toward 6.2 percent once again.

FX – NZD/USD

The NZD/USD has come under pressure after peaking to a multi-decade high of 0.8200 in March, and has been range-trading between 0.7500 and 0.7650 since mid June. Market participants anticipate economic activity to slow further as the RBNZ continues to hold the benchmark interest at the record high of 8.25 percent, which could renew bearish sentiment among traders once again. The retail sales release has been known to be a market-mover for the NZD/USD when the data is surprising, and may push the currency pair higher towards the upper bound if the release comes out as expected. However, a fall in retail sales could heighten selling pressures for the New Zealand dollar, and may lead the pair back down toward near-term support of 0.7500.

Equities – NZX 50 FF Gross Index

Growth concerns for the New Zealand economy paired with record high commodity prices has triggered a major downfall in the NZX 50 since June, but has held within the 3,200 to 3,000 range in July. Rising unemployment paired with rising living costs poses to be an ongoing threat for consumers, and may heighten downside pressures for the retail sector. The NZX 50 could face heavy volatility following the retail sales release as economist forecast the headline figure to fall to -0.1%, while retail sales less autos is expected to improve to 0.5% from -0.5%. If the release falls in line with expectations, the index could rise towards the upper tail of the range to test the near-term resistance at 3,175. On the other hand, a bigger-than-expected fall in the sales data could spur additional losses in the index toward the psychologically important 3,000 level.

Terri Belkas is a Currency Strategist at FXCM.