NZD
Retail sales figures fell 0.2 percent in the June quarter, while sales by volume slipped some 1.5 percent – reaffirming a substantial slump in the retail sector.

The fall in sales by volume follows a 1.2 percent drop in the March quarter and was the first time in 10 years that volumes have dropped for two quarters in a row.  The largest single contributor to the drop in volumes was motor vehicle retailing, which had its biggest quarterly drop since Statistics New Zealand began producing these figures in 1995.  Motor vehicle figures fell 4.8 percent by volume in the latest quarter and 5.1 percent by value.  Excluding motor vehicles, core retail sales fell by less than 0.1 percent by value and 0.7 percent by volume.  Some 16 of the 24 retail sector industries had higher sales in the June quarter.  Today’s figures from Statistics New Zealand follow a very sharp 1.2 percent drop in overall sales figures May.  In June there was a slight bounce-back, with sales increasing 0.9 percent by value.  But overall, the latest retail statistics reaffirm the picture of a country moving into recession.  ANZ-National Bank senior economist Khoon Goh said: “The consumer remains weak and the wallet remains shut.”  UBS senior economist Robin Clements said the figures “pretty much” ensured June quarter real GDP would fall.

The Reserve Bank lowered official interest rates last month to 8 percent from 8.25 percent and has indicated there is plenty of room for further cuts.  Economists expect another 25 basis points cut next month.  The sharp slowdown in economic activity is coming even as inflation goes into overdrive, having recently hit 4 percent.  However, the Reserve Bank has indicated it is prepared to put immediate concerns about inflation on the backburner in favour of providing some stimulus for the flagging economy.
AUD
In Australia the near-term inflation forecasts were uplifted due to: higher that higher than expected outcomes for both the CPI and the underlying inflation rates in the June quarter; higher petrol prices than expected when the May forecasts were done; and a rise in inflation expectations.

Part of the reason why the RBA is becoming more concerned about the growth outlook is the worsening
international backdrop.  The RBA notes that, so far, the slowdown in global growth has been most evident in the industrialised advanced economies.

Economist’s forecasts see two 25bps cuts over the next two months and more cuts during the first few months of 2009, taking the cash rate to 6.00% by April of next year. This is a slightly more aggressive outlook for RBA than the market has currently priced.

The week ahead:
NZD
Tuesday 19th – Producer Prices (Q2) – qoq
Thursday – 21st Visitors Arrivals (Jul), Credit Card Spending (Jul) –yoy
AUD
Tuesday 19th – RBA Board Minutes from August meeting
Thursday 21st – New Motor Vehicle Sales (Jul) – mom

GBPNZD
At opening last week the rate was at GBPNZD 2.729 climbing on Wednesday to spend a brief stint in the high GBNZD2.75’s before falling sharply to trade in the GBPNZD 2.65- 2.67 range for the remainder of the week.

Despite the Bank of England giving its bleakest economic assessment for more than a decade.  Mervyn King, the Bank of England governor, said the British economy required a “painful adjustment to higher energy and food prices, forecasting it would grind to a halt for a year before recovering, probably to a slower growth path.  There was “bound to be a quarter or two” of economic contraction.

Most economists shared the market’s view that the Bank was signaling a bias to start lowering interest rates, probably late this year or early next. Simon Hayes of Barclays Capital said: “The surprise today was not so much that the next move in rates is likely to be down, but that the Monetary Policy Committee seems happy to nurture this expectation.”

With second tier data out this week in both countries we could see the rate remain back down in these lower levels after the negative sentiment released in the UK last week.

Data out in the UK this week:
Thursday 21st – MPC Meeting Minutes
Friday 22nd – Retail Sales m/m, Revised GDP q/q
GBPAUD
The GBPAUD rate traded in the GBPAUD2.15’s at the beginning of the week and as with the GBPNZD Sterling gained the upper hand on Wednesday to trade up at GBPAUD 2.195 before retreating back down into the GBPAUD 2.13’s gaining some ground back and closing the week in the GBPAUD 2.15’s.

With commodity prices still lowering and all the data coming out poor last week from both countries we could continue to see the GBPAUD rate trade between the 2.12 – 2.15 band possibly with Sterling falling lower as the comments from Mervyn King get absorbed by Sterling furthermore. For upcoming GBP data please see GBPNZD above.
EURNZD
EURNZD started last week at 2.132 gaining a little mid week to 2.174 before falling back down into the EURNZD 2.11’s by the end of the week.

Also a relatively quiet week for the Euro zone, we should get a better picture as to how the third quarter is shaping up after the 0.2% decline in Q2 GDP.  The August ZEW Survey will be watched closely for any signs that German output growth is stalling.  A wider perspective on Euro zone activity will come from the Flash Estimate of the PMI indices for July.  A further contraction in manufacturing and services is anticipated.

The week ahead in the Euro calendar:
Tuesday 19th – German Producer Prices (Jul) – mom, ZEW Survey (Econ Sentiment Aug)
Wednesday 20th – Construction Output (June) – mom
Thursday 21st – PMI Manufacturing (Aug)
EURAUD
Started last week at EURAUD 1.686 then spiked on Wednesday to EURAUD 1.73 before declining back into the EURAUD 1.70’s for close of play on Friday.  The EUR reaching its highest levels since March this year against the Australian Dollar.

The rally from the EUR could be attributed to that fact there was further clarification in speeches from Assistant Governor Lowe and Deputy Governor Battellino confirming that a rate cut in September is in the offing.  This week’s release of the RBA Board minutes will provide more colour on the discussion.

With economic sentiment out in the Euro zone this week forecast to be negative the EURAUD could hover between the lower range of EURAUD 1.68 – 1.70 with the Euro possibly having the chance to gain on the AUD following what is reported in the RBA Board Minutes from August meeting.  For the upcoming Euro zone data please see EURNZD above.
NZDUSD
At the beginning of last week the NZDUSD sat at 0.701 the USD the gradually strengthened against the New Zealand Dollar lowering the rate to NZDUSD 0.686 on Wednesday.  The NZD fought back and gradually regained its position closing at NZDUSD 0.699 on Friday.

Sentiment in the US is that the economy has hit rock bottom and so there is only one way up from here for the economy and that is up.  There are also hopes that the housing market is beginning to stabilise as house prices fall.

FOMC dissenter Fisher is due to speak this week on the US economy about the inflationary worries that are pressing for higher interest rates.  If dataflow continues to be positive then the dollar rally could extend further in the near term, however the NZD will do its best to stay up above the NZDUSD 0.70 resistance level however we might see more volatility and gains for the USD around the interest rate decision in New Zealand September 11th.

The week ahead in the US calendar:
Tuesday 19th – NAHB Housing Market Index (Aug)
Wednesday 20th – Producer Price Index (Jul)
Friday 22nd – Initial Jobless Claims (w/e Aug 17)
AUDUSD
Similarly to the NZDUSD rate the USD made some gains on the AUD, difference being the US Dollar managed to hold onto the ground it made on the AUD more so than with the NZD.  At opening of play on Monday the rate was at AUDUSD 0.889 declining to 0.862 on Wednesday and for the remainder of the week range trading between the AUDUSD 0.86 – 0.87 band.  For the upcoming US data see NZDUSD above.
AUDNZD
The NZD came out on top of the pair last week commencing the week at AUDNZD 1.262 and steadily declining to the 1.23’s with what seemed like very little resistance from the AUD.  The AUD possibly taking blows from the market pricing in interest rate cuts in Australia as they now become more of a reality with inflation forecasts worse than anticipated.

With further falls in industrial metal prices (along with gold and oil) over the past week on continuing risks of a sharp contraction in global economic activity could push the AUD lower.

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Please feel free to contact me (renee.doughty@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar.

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Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.

Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms