By DailyFXOnly a few weeks ago the Reserve Bank of New Zealand raised the nations overnight lending rate by 25 basis points to a record… … 7.50 percent.

Under normal circumstances, this would immediately dampen
expectations of further tightening while the monetary authority monitors
the effects on the economy. However, New Zealand is not the usual case.
In a statement following the announcement of, RBNZ Governor Alan Bollard
made sure to telegraph his intentions to stay on the inflation war path.
Bollard left the door for future rate hikes wide open — saying the only
relief for inflation (and his hawkish outlook) was through a cooling of
the booming housing market and domestic spending. Coincidently or not,
the economic calendar for the next two weeks clearly paves the way for
the next interest rate deliberation on April 25th and 26th with a
spending indicator out tomorrow and housing and inflation numbers due
next week. For tomorrows report, economists are predicting the retail
sales indicator to print a 0.5 percent rise. If the forecasts are
correct, this would match the pace from the previous two months.
According to the complimentary data available, the markets consensus
seems well founded. On the one hand, consumers had to deal with steadily
rising energy prices through February and consistently high lending
rates. At the same time, the unemployment rate through the end of 2006
dropped to 3.7 percent while wage growth through the entire year
accelerated by a record 3.2 percent. More timely in its support, a gauge
of transactions made with credit and debit cards (accounting for more
than 50 percent of total retail spending) rose 1.6 percent for the same
period. Should the governments retail sales indicator hit the wires
with a considerable surprise, speculation over an impending rate hike
could soar, weighing on equities and sending the kiwi and government
bond yields soaring.

Bonds – 10-Year New Zealand Government Bond Yields

Yields on ten-year New Zealand government bonds have consolidated in
the past few weeks as economic indicators cooled hawkish sentiment after
the central banks decision to hike the benchmark lending rate. However,
congestion may finally be shed as traders look ahead to a series of
reports that may very well push policy officials to yet another interest
rate hike. To start things off, tomorrows retail sales report will
measure consumer spending one of RBNZ Governor Bollards top concerns
for policy making. Whether or not a third 0.5 percent monthly increase
in sales will incite rampant speculation of another rate hike this month
remains to be seen. On the other hand, a better-than-expected print
could easily raise the stakes and send yields on the 10-year bond
through 5.950.

FX – AUD/NZD

The AUDNZD cross has held in a region of frustrating congestion between
1.1250 – 1.1375 over the past few weeks and nears the apex of a
symmetrical triangle, signaling major breakout potential. However, the
high-yielding currencies have both been appreciating significantly as
risk-seeking traders indulge in the carry. A single look at the Aussie
and Kiwi against the US dollar and the Japanese Yen look nearly
identical. However, the release of economic data out of New Zealand
could bring the AUDNZD components to decouple, as interest rates on the
Kiwi side are still a solid 150 basis points higher than on the Aussie
side. Retail sales for the month of February are estimated to rise 0.5
percent once again, and a reading at or above expectations could bring
speculation of another rate hike by the Reserve Bank of New Zealand to
jump, as the central bank will be eager to cool resilient consumption.
On the other hand, a more tepid retail sales report would indicate that
the RBNZs past policy actions have started to make an impact, and with
another round of policy tightening expected from the Reserve Bank of the
Australia within the next few months, AUDNZD could make its break to the
upside.

Equities – NZX 50 FF Gross Index

New Zealand equities edged back during the last trading session as a
lack of liquidity allowed shares to fall lower. Indeed, analysts
speculated that few headline stocks looked cheap with blue chip power
company Contact Energy down 2.1 percent to NZ$9.08 after its recent run
up, sending the NZX-50 Index down 0.8 percent to 4,147.36. Exporters
were also under pressure after the New Zealand dollar tested fresh
22-month highs against the US dollar, making products out of the country
increasingly expensive. Fisher & Paykel Healthcare and Fisher & Paykel
Appliances, which generate much of their revenue in US dollars, closed
down 1.4 percent at NZ$3.66 and 0.3 percent at NZ$3.69, respectively.

Should liquidity conditions remain thin, New Zealand equity markets
could be in for further declines. Furthermore, the release of retail
sales for the country could accelerate the NZX-50 Indexs trek lower, as
the figure is anticipated to rise 0.5 percent once again in February. If
sales hit the tape at or above expectations, speculation of another rate
hike by the Reserve Bank of New Zealand could jump, as the central bank
will be eager to cool resilient consumption. With a benchmark of 7.50
percent well above that of other developed countries another round
of monetary policy tightening would not only raise already-hefty
borrowing costs for businesses in New Zealand, but it was also send the
national currency surging higher, hurting exporters even more. On the
other hand, a more tepid retail sales report would indicate that the
RBNZs past policy actions have started to make an impact, and could
restore confidence amongst equity traders that upside potential for
interest rates is limited.

Regards,

John Kicklighter
Currency Analyst, Research
Forex Capital Markets LLC
32 Old Slip, 10th Fl
New York, NY 10005
Tel: (212) 897-7660
Fax: (212) 897-7669
Email: jkicklighter@dailyfx.com

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