New Zealand's economy is producing mixed signals that, on the one hand, could be interpreted as the beginning of a recovery after four consecutive quarters of contraction, and on the other, suggest that the process will be complex and likely protracted.

The terms of trade index rose 4.1% in the second quarter, but this was driven largely by a 0.2% increase in export prices alongside a 3.7% fall in import prices. However, if we look at trade volumes, exports actually declined by 3.7%, while imports rose by 4.2%, meaning that net external trade made a negative contribution to quarterly GDP.

Earlier, data on retail sales showed healthy growth but remain insufficient to rule out a GDP contraction in the second quarter. Employment is increasing, but the year-on-year figure remains in negative territory, as the depth of the labor market downturn has exceeded even the Covid period.

Consumption remains subdued as the ANZ consumer confidence index fell by 3 points to 92 in August, reaching its lowest level in 10 months. Business confidence ticked up by 2 points to 50 in August, but both expected and past activity indicators declined. Inflation measures have eased, indicating the risk of persistent inflation spikes is moderating.

Overall, the latest data released since the most recent RBNZ rate cut do little to inspire confidence in a robust New Zealand recovery. The forecast calls for a 0.1% contraction in GDP in the second quarter, bolstering expectations that the RBNZ will cut rates further. ANZ Bank analysts expect the policy rate to be lowered from the current 3.0% to 2.5% by year-end.

As a result, NZD/USD can only appreciate if the Federal Reserve cuts rates even more aggressively, or if the US economy moves toward recession. For now, markets are operating under this assumption or something close to it, which largely explains projections for further weakness in the dollar. But given the considerable uncertainty, such a one-sided view looks questionable—New Zealand still faces substantial challenges.

Net short positions in NZD increased by $118 million over the reporting week to -$358 million. Positioning remains neutral, with growing bearish bias. The estimated fair value is below the long-term average and is trending lower.

The NZD/USD rebound from 0.5800 support was shallow, with a local high formed at 0.5911. The New Zealand dollar was unable to move higher, making this the main resistance level. We see a growing trend toward further declines, expect a retest of 0.5800, and a move toward the next support at 0.5725.