Staying Short on the NZD After the Q2 Retail Sales
Commodity dollars including the New Zealand Dollar (NZD) have been performing below expectations compared to other currencies, partly due to the worsening economic outlook in China, which has been keeping risk sentiment subdued. The economic growth outlook has lacked in New Zealand during this year. Additionally, there is a belief that interest rates in New Zealand have reached their highest point and are unlikely to increase further after the Reserve Bank of New Zealand (RBNZ) hold steady its cash rate, which was in line with expectations. However, the RBNZ also slightly adjusted its anticipated timeline for when it might begin reducing interest rates, with the new projection indicating that this might not occur until 2025.
The outlook for the FED is similar, but markets have taken that as bullish and the USD has benefited from that. Over the weekend, China’s officials made a commitment to coordinate financial assistance aimed at resolving issues related to local government debt. This move was likely prompted by the deteriorating financial situation of local governments, which has been exacerbated by the prolonged weakness in the property sector. This weakness has led to financial difficulties for several property developers, resulting in a credit shortage and negative sentiment in financial markets.
The US economic data, on the other hand, is surpassing expectations, indicating positive economic growth. However, there’s a contradiction between this data and inflation expectations and Consumer Price Index (CPI) readings, which continue to show a trend of decreasing inflation. The most recent Core CPI month-over-month figures were at 0.16%. Despite the robust economic data, the market sentiment suggests that there’s no anticipation of a further interest rate hike from the Federal Reserve (Fed), although they’re likely to keepthe higher for longer stance.
Moving on to New Zealand, the Reserve Bank of New Zealand (RBNZ) has chosen to keep its official cash rate unchanged. This decision is underpinned by the intention to maintain a restrictive monetary policy stance in order to bring down inflation and align it with the target range.
Interestingly, New Zealand’s recent inflation and employment data have been positively surprising. However, there’s a contrasting situation in the Purchasing Managers’ Index (PMI), with the Services PMI recently dipping into contraction territory. Additionally, wage growth has fallen short of expectations, and central banks are closely monitoring this aspect for potential second-round effects on inflation. Given the current circumstances, it is widely expected that the RBNZ will maintain the cash rate at its current level during the upcoming meeting so the pressure will stay on the downside for NZD/USD and we will sell retraces higher.
New Zealand Retail Sales Report for Q2
- Q2 Retail Sales -1.0% vs -0.4% expected
- Q1 retail sales were -1.4%
- Retail sales YoY -3.5%
- Prior retail sales YoY were -4.1%
- Core retail sales ex-autos Q2 -1.8% vs -0.4% expected
- Q1 core retail sales were -1.1%
NZD/USD Live Chart
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