Retail Sales (MAY) (22:45 GMT; 18:45 EST)
Expected: 0.5%
Previous: -1.2%

Retail Sales Ex. Auto (MAY) (22:45 GMT; 18:45 EST)
Expected: 0.3%
Previous: -0.9%

How Will The Markets React?

Retail sales in New Zealand are expected to have rebounded in May, as a tight labor market and rising wages fuel consumer spending. New Zealand companies, which have experienced a commodity-price led boom, have found it increasingly difficult to attract workers, which is stoking wages and fanning consumption growth. With these factors likely to add to inflation pressures, signs of further acceleration in domestic demand could lead Reserve Bank of New Zealand Governor Alan Bollard hike rates for a fourth time this year to 8.25 percent on July 25th. However, the decision will also depend greatly upon next Sunday's Consumer Price report for the second quarter. That figure is anticipated to ease back to 1.8 percent on an annual basis from 2.5 percent, which would leave Bollard more time to decide whether additional policy tightening is necessary. Nevertheless, the RBNZ has surprised the markets with policy tightening at the most recent two meetings, so while analysts may not believe that the New Zealand economy can withstand another rate hike, Bollard's mission to nip inflation in the bud has the potential to drive the country's benchmark even higher. New Zealand bonds will likely be the most vulnerable to this event risk, while forex and equity price action may only show mild reactions as they await the more market-moving consumer price data due out next week.

Bonds – 10-Year New Zealand Government Bond Futures

The mild range in New Zealand government bond futures continues to take prices higher, with the recent bout of risk aversion in the markets leading bonds up to 93.29. New Zealand bonds could take a hit on Thursday, however, as a rebound in retail sales could ramp up expectations for policy tightening by the RBNZ on July 26th. Any reaction may be mild, though, as more market-moving consumer price data will be released early next week. Furthermore, the bonds are more likely to follow the lead of global fixed income price trends.

FX – NZD/USD

Over the past twelve months, the New Zealand dollar has surged 27 percent against the US dollar as the Reserve Bank of New Zealand’s overwhelmingly hawkish stance has driven interest rates there to a record high of 8.00 percent. Furthermore, risk seeking investors have driven popular carry trades through the roof, and given recent interest rate differentials, it’s no surprise that the New Zealand dollar has been the vehicle of choice. Nevertheless, news that the S&P may cut ratings on $12 billion worth of subprime mortgage-backed bonds spooked the markets and led to a bout of risk aversion on Tuesday, leading the New Zealand dollar lower against the greenback, but especially against the Japanese yen.

While the pair’s descent below the 0.7800 level has bearish implications, a strong retail sales report could easily take Kiwi higher with consumer price data and an RBNZ rate decision looming on the horizon. Furthermore, NZDUSD has managed to hold above an ascending supporting trendline, leaving its uptrend in place. On the other hand, substantial resistance lies above at 0.7900, with the pair generally looking very top heavy. Should we see that retail sales are actually a bit softer than expected, the news could spark further declines targeting 0.7690.

Equities – NZSZ-50 Index

New Zealand’s bourse followed the downward spiral in global equities set in motion yesterday after credit rating agencies Moody’s and S&P announced their decision to downgrade ratings on debt backed by US subprime mortgages. The benchmark NZSX-50 index declined 7.16 points, or 0.16 percent, to 4229.68. Turnover amounted to NZ$136 million, and losses outweighed gains 67 to 34 on 141 stocks traded. Gains were led by South Port, up 4 percent to NZ$260 after the issue of exploration permits for boosted expectations of greater port traffic.

Today’s move was relatively mild, as the NZSX-50 continues to consolidate between 4,215 and 4,250, similar to what it has done for more than a week. Such price action tends to lead to powerful breakouts – will retail sales be the spark? Probably not, as the much more market-moving consumer price report will be released early next week and is of far greater use to traders in gauging the outcome of the next RBNZ meeting. Nevertheless, a strong retail sales figure could lead the equity index down towards support at 4,180, but the next big move for the NZSX-50 is not likely to occur until inflation data is released or upon a jump in volatility in commodity prices.

Terri Belkas is a Currency Analyst for FXCM.