NZD: Weak Retail Sales & China Growth Concerns in Focus
During the Asian trading session, the primary foreign exchange rates have demonstrated a notable degree of stability. The dollar index remains near recent highs, hovering around the 103.50-level. Presently, there is an effort to reestablish a breach above the 200-day average, situated at approximately 103.20. This attempt marks the first occurrence since November of the previous year.
A significant economic release from the overnight period involved New Zealand's latest retail sales report, which unveiled a more pronounced deceleration in spending during the second quarter. Adjusted for inflation and seasonal effects, sales experienced a decline of -1.0% in Q2. This contraction exceeded the consensus forecast from the Bloomberg survey by more than double. This decrease follows a downwardly revised -1.6% contraction in Q1, constituting the third consecutive quarter of negative growth.
This report underscores the persistence of a recession in New Zealand's economy. GDP contracted for two successive quarters, with a decrease of -0.7% in Q4 2022 and another -0.1% in Q1 2023. An additional mild contraction of -0.1% is currently anticipated for Q2. In the recent RBNZ policy meeting, Governor Orr emphasized the necessity of a mild recession due to demand outstripping the supply capacity of the economy. He advocated for restrained consumer spending, business investment, and government expenditure.
Surprisingly, from a policy standpoint, the RBNZ signalled its intention to maintain a tighter policy stance for a more extended period, even as the economy clearly enters a recession. This approach is aimed at ensuring inflation returns to target levels. Projections from the RBNZ anticipate continued contraction by -0.3% in Q3 and -0.1% in Q4.
Despite the dim growth prospects, the RBNZ's updated forecasts have indicated an increased risk of an additional rate hike. The likelihood of rate cuts has been pushed out to around 18 months. Strangely, the New Zealand dollar has not gained from the RBNZ's recent hawkish policy update. In the current month, it ranks as the second-worst performing G10 currency, experiencing a sharp -4.1% decline against the US dollar. This has driven the NZD/USD rate to a new low for the year at 0.5897, descending further from the peak observed on July 14th at 0.6412.
The sudden plunge in the New Zealand dollar has captured the attention of the RBNZ's Chief Economist, Paul Conway. He has indicated that they will closely monitor this depreciation moving forward. Conway attributes the recent depreciation to diminishing interest rate differentials and increased risk aversion. The currency's underperformance aligns with other commodity-linked currencies, as concerns over China's growth slowdown take centre stage.
In response to a more pronounced slowdown in China than initially anticipated, which could negatively impact exports and growth, Conway stated that the RBNZ would consider lowering the OCR sooner than initially indicated. Overall, these developments are poised to reinforce the recent bearish trend observed in the New Zealand dollar.
YIELD SPREADS MOVING BACK IN USD’S FAVOUR
Source: Bloomberg, Macro bond & MUFG GMR
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