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New Zealand Retail Sales: Will Lockdowns Change Trajectory?

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Over the weekend, RBNZ’s Chief economist Ha insisted that Auckland’s latest outbreak of covid cases is not a “game-changer”.

Admittedly it provides some uncertainty, but the main takeaway was to double down on Orr’s comments from Thursday. Specifically, he said that the latest round of lockdowns wouldn’t affect the trajectory of monetary policy.

One of the important points for forex traders to note was a somewhat ignored comment from Ha that the NZD is performing as usual. This dovetails with what Orr was saying previously, about how “the more the currency does on tightening, the less the RBNZ has to do on tightening.”

What does this mean?

The RBNZ worries about inflation, and the exchange rate plays into that in particular, considering that New Zealand imports a lot of its consumer goods.

So, if the Kiwi dollar gets stronger, then foreign goods get cheaper. This lowers inflationary pressures and slows the amount of foreign capital in the country.

This last point is important for addressing the housing issue, where foreign investors drive a significant amount of the price. If the NZD is higher, then that raises the housing prices for foreign investors faster than for domestic buyers.

Where the exchange rates might go

The practical effect of a stronger NZD is somewhat equivalent to having higher interest rates, without the negative impact on the domestic market.

Normally, a higher exchange rate would be negative for an economy because it would discourage foreign investment. But in the extraordinary circumstances of covid, some “tightening” by a higher NZD might be preferable to the RBNZ than actually raising rates.

The problem is that the NZD had been getting stronger expecting that the RBNZ will raise rates. They might get away with postponing the decision until the next meeting, given the uncertainty around the latest lockdowns.

But, as Orr insisted, the October meeting is very much a live meeting. In fact, the current consensus is that the RBNZ will raise rates. It would, therefore, be reasonable to expect the NZD to get stronger in anticipation.

What could change?

Orr also said that the trajectory is firm unless there is a major shock in demand.

And, as it happens, tonight we have the release of Q2 retail sales from New Zealand. The Kiwis only provide this data every quarter, so it generally has a bigger impact on the market.

In the meantime, until the October meeting, we probably want to pay close attention to the electronic card transaction data.

Economists anticipate New Zealand retail sales to come in at +2.0% compared to 2.5% in the first quarter. It’s a slowing of the pace, but given the circumstances, it might be quite healthy.

A miss on expectations, however, might lead some investors to worry that the RBNZ might look for another excuse to delay raising rates. In turn, this could weigh on the Kiwi.

On the other hand, there is such a strong consensus that there will be a rate hike at the next meeting that a beat of expectations isn’t as likely to cause the Kiwi to move higher.

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