In August, New Zealand’s card retail sales saw a month-on-month increase of 0.7%, rising from a prior increase of 0.2%.
On a year-on-year basis, sales increased by 0.9%, a decrease from the previous rate of 1.7%.
Currency Movement
The NZD/USD currency pair exhibited minor movement, staying slightly lower despite a previous strong rally. This earlier rally was driven by US CPI data that impacted expectations regarding a potential rate cut by the Federal Open Market Committee in September.
The modest monthly pickup in retail sales is unlikely to change the Reserve Bank of New Zealand’s course, especially with annual growth slowing down. We see this mixed data as confirmation the RBNZ will remain on hold with its Official Cash Rate at 5.50%. The domestic economy does not appear strong enough to warrant any hawkish surprises.
We must recognize the NZD/USD’s recent move higher was almost entirely due to weak US inflation figures fuelling bets on a Federal Reserve rate cut. The market’s attention is fixed on the FOMC meeting later this month, not on New Zealand’s internal data. Futures markets are currently pricing in more than an 80% chance of a 25 basis point cut from the Fed, making this the single most important driver for the currency pair.
Trading Strategy
This environment suggests trading volatility rather than taking a strong directional view on the NZD itself. Using options, such as straddles or strangles that expire after the Fed’s announcement, could be an effective way to position for a significant price move. Implied volatility for these contracts is likely to rise as we approach the event.
Looking back at previous cycles, like the lead-up to the Fed’s pivot in 2019, the market often gets ahead of itself in pricing easing cycles. The primary risk to any position favouring NZD strength is a hawkish surprise from the Federal Reserve. If they signal a delay or push back against market expectations, the US dollar would likely rally sharply.
