New Zealand's economy may be showing signs of weakness that could give investors a reason to reconsider the NZD, especially against the AUD and CAD. Here are the key highlights:

1. New Zealand Retail Sales Slump:

   Warning Signals: The recently released retail sales data for Q2 revealed a decline of -1%, continuing a trend of similar quarterly declines.

   Central Bank Expectations: This contraction throws into question the Reserve Bank of New Zealand’s (RBNZ) previous optimism that rates could be held at 5.50% until late 2024 before any rate cuts come into play.

2. Swap Rates and Currency Dynamics:

   Rate Outlook: Following the disappointing retail numbers, the 2-year swap rate in New Zealand has declined by over 10 basis points.

   Currency Resilience: Despite a weaker economic outlook, the NZD/USD pair has been bolstered by a softer USD and a stronger Chinese Yuan (CNY).

3. Chinese Yuan Impact:

   External Support: Reports suggest that Chinese state-owned banks have been purchasing CNY, offering some degree of support to the NZD/USD.

4. Strategic Moves for Investors:

   Cross Currency Plays: Investors keen on exploiting the expected downturn in New Zealand rates might find the most promising opportunities in shorting the NZD against either the AUD or CAD.

Conclusion: The contraction in New Zealand's retail sector signals economic vulnerabilities that the RBNZ might have underestimated. This new data makes a strong case for investors to consider selling the NZD, particularly against the AUD or CAD, to potentially benefit from New Zealand's shifting economic landscape.