New Zealand Dollar: Retail slump yet hikes priced – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad highlights that New Zealand retail sales volumes unexpectedly fell in Q2, driven by fuel and motor-related categories, while core sales still rose, showing resilient domestic demand. Markets have virtually fully priced a 25 bps Reserve Bank of New Zealand (RBNZ) hike to 2.75% on September 2 and a total of 75 bps tightening over twelve months, but NZD/USD upside is seen as limited.

RBNZ tightening but NZD upside capped

"New Zealand retail sales volume unexpectedly plunges in Q2. Total retail sales volume dropped -0.5% q/q (consensus: 0.2%) vs. 1.0% in Q1, driven by fuel, motor vehicle and parts retailing."

"Excluding these volatile items, core retail sales volume increased 0.7% q/q vs. 1.1% in Q1, indicative of resilient domestic demand activity."

"The next RBNZ policy decision, which also includes a fresh Monetary Policy Statement, is on September 2 and a 25bps back-to-back hike to 2.75% is virtually fully priced-in."

"Over the next twelve months, the swaps curve implies 75bps of tightening to 3.25%. That’s reasonable given above target inflation and a policy rate near the lower-end of the RBNZ’s neutral range (2.20%-4.10%). "

"Still, NZD/USD upside is limited as the cross has already outrun rate differentials. "