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Written by Terri Belkas, Currency Analyst

Retail sales in New Zealand are expected to have risen slightly in January, as higher energy and food prices boost the index reading. Indeed, credit card spending in the country – which has served as a good leading indicator of retail sales over the past few months – accelerated during January to an annual rate of 8.6 percent from 7.6 percent.

MAR 12	NZ Retail Sales (JAN) (21:45 GMT; 17:45 EST)	Retail Sales Ex. Autos (JAN) (21:45 GMT; 17:45 EST)
	Expected:                            0.3%	Expected:                          0.1%
	Previous:                             0.1%	Previous:                           0.3%

What Are The Markets Facing?

Retail sales in New Zealand are expected to have risen slightly in January, as higher energy and food prices boost the index reading. Indeed, credit card spending in the country – which has served as a good leading indicator of retail sales over the past few months – accelerated during January to an annual rate of 8.6 percent from 7.6 percent. However, if an ‘improvement’ in the reading is purely the result of a pick up in prices, it will be clear that aggressive policy tightening by the Reserve Bank of New Zealand over the course of 2007 has had its intended effect: to cool the economy. Nevertheless, the news would support the persistently hawkish bias of the RBNZ, whose benchmark interest rate currently sits at a record high of 8.25 percent. Similar to the Reserve Bank of Australia – which raised rates last week to an 11-year high of 7.25 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 last week that a “tight labor market, strength in commodity prices, and the impact of assumed personal tax cuts will add to inflationary pressure.” 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 pulled back from resistance at the 6.60 percent level as an increase in risk aversion has pushed prices higher. However, yields have yet to test trendline support just above 6.20 percent as the Federal Reserve’s efforts to boost liquidity have sent equities and carry trades higher, while government debt has fallen. 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 towards support, while a better-than-expected figure could help propel yields above near-term resistance at 6.33 percent towards 6.40 percent.

FX – NZD/USD

The NZD/USD pair has bounced from Fibonacci and 50 SMA support at the 0.7865/7900 level amidst a rebound in carry trades following the announcement that the Federal Reserve and multiple other central banks would make an effort to boost liquidity. However, the release of New Zealand retail sales could determine the pair’s next move, especially if the data is surprising. Stronger-than-expected spending during the month of January will support additional gains for the New Zealand dollar, though the pair must first break above resistance at 0.8043/50. Potential targets loom above at 0.8082 and 0.8133. On the other hand, a disappointing retail sales report or a return to risk aversion could weigh NZD/USD back down towards support at 0.7900.

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Equities – NZX 50 FF Index

Equity markets in New Zealand have been hit particularly hard hit in recent weeks, and while the NZX 50 has gone on to consolidate between 3,500 – 3,625, 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 January. 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 bring 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 below 3,500, with sharp declines targeting the August 2006 low of 3,415.

 

Compiled by Terri Belkas, Currency Analyst, Forex Capital Markets LLC, DailyFX.com

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