New Zealand Retail Sales Sends the Kiwi Flying

If you’re wondering what led to the early spike in NZD/USD yesterday, wonder no longer. It was all about the New Zealand retail sales report!

New Zealand shocked the markets when it reported that retail sales grew by 2.1% in Q4 2012, a figure that was well above the consensus forecast of a 1.3% growth. In setting a new 32-month high, the retail sales report launched the Kiwi to a record high of its own; NZD/USD traded at levels not seen since September 2011.

NZD/USD 15-minute Chart

The largest contributions to growth came from fuel sales, which was up 7.7% in the quarter. Meanwhile, hardware, building, and garden supplies reported an increase of 4.3%, while motor vehicles and parts saw a growth of 2.0%.

As surprising as these strong figures were, they’re actually quite consistent with the overall trend in New Zealand retail sales. The long-term picture shows that both sales volume and sales value have seen quite a recovery from their lowly levels back in 2009. And so far, consumer spending isn’t showing signs of slowing down this year – it’s reported that electronic card transactions grew for the fourth straight month in January.

Of course, when faced with a trend like this, it’s hard not to wonder about sustainability. How long can consumer spending continue to grow at this pace?

The way I see it, it is possible for retail sales to continue growing at this rate, but it won’t be easy. Remember, last quarter also saw a massive 1.0% drop in employment and a 1.2% decline in the participation rate. These could very well translate to weaker consumer spending down the line as the unemployed cut back on spending.

Another big question that this upbeat retail sales report raised is how it might affect the Reserve Bank of New Zealand’s monetary policy.

If you ask me though, it does suggest that the economy is finally making headway, it’s unlikely that it will get the RBNZ to raise its official cash rate from its record low of 2.50% soon. According to a survey by Reuters, majority of economists believe the outlook for monetary policy remains unchanged and that the next adjustment to interest rates won’t come until later this year or even in early 2014.

If anything, this retail sales report tells us that the central bank’s low rates are finally working their magic, so the RBNZ will probably want to give it a little more time to take effect and allow the economy to gain more traction before tightening monetary policy.