New Zealand’s business confidence in July rose to 47.8%, an increase from the previous 46.3%. Business activity, however, showed a slight decline to 40.6%, down from 40.9%.
The past activity measures revealed diverse experiences across sectors. While agriculture experienced growth, the construction and retail sectors faced a renewed downturn.
Uptick In Business Confidence
We see the slight uptick in July’s business confidence. However, the drop in actual business activity and the very mixed sector performance suggest a fragile economic landscape. This points to an economy that is not improving uniformly, creating specific opportunities rather than a broad bull market.
We believe traders should focus on the clear split between sectors. Agriculture is showing remarkable strength, supported by recent news of Fonterra raising its milk payout forecast to NZ$8.50, while retail and construction are slumping. This suggests considering long positions in agribusiness-related derivatives and bearish plays on companies tied to domestic retail, especially after last quarter’s reported 0.7% fall in retail sales volumes.
The sluggish domestic activity makes it highly unlikely the Reserve Bank of New Zealand will raise interest rates in the near term. With the RBNZ holding the Official Cash Rate at 5.50% last week and Q2 inflation easing slightly to 3.8%, the path of least resistance for the NZD is sideways to down. We would be cautious about buying the Kiwi dollar, which has struggled to hold gains above the 0.6150 level against the US dollar for most of this year.
Market Movement Outlook
The forward-looking indicators suggest a period of low overall market movement in the coming weeks. Implied volatility on the NZX 50 index is hovering near one-year lows, making strategies like selling covered calls or cash-secured puts on stable blue-chip stocks potentially attractive. However, be aware that individual sectors could experience sharp moves, so broad market shorts on volatility might be risky.
