[B]New Zealand Dollar / US Dollar Monthly Technical Forecast[/B]
The NZDUSD is in the same position as the AUDUSD. The decline from its 2008 high was a 5 wave affair. A 3 wave rally from the low (.4890) should be nearing completion as price enters a resistance zone defined by the 50%-61.8% retracements of the larger advance (.6550-.6950).
[B]New Zealand Dollar / US Dollar Interest Rate Forecast[/B]
As the second-highest yielding G10 currency, the New Zealand dollar remains highly sensitive to domestic interest rate developments. The clear improvement in global risk sentiment has meant that investors now seek the attractive carry returns in the NZD/USD and NZD/JPY, and general risk-seeking behavior clearly bodes well for the high-yielder. The Reserve Bank of New Zealand has likewise placated NZD traders by showing comparatively little willingness to slash interest rates further; Overnight Index Swaps predict the RBNZ will leave rates unchanged in the coming 12 months.
Our interest rate-based New Zealand dollar forecast is bullish, but it likewise remains critical to watch general financial market trends as they relate to the NZD. A sharp deterioration in financial market conditions could easily erase much of the NZD/USD’s recent gains.
[B]New Zealand Dollar / US Dollar Valuation Forecast[/B]
[B]NZDUSD Valuation Forecast: [/B][B]Bearish[/B]
In a similar fashion to its Australian counterpart, the New Zealand Dollar has attracted substantial buying interest as capital shifted out of safety and back into risky assets. The bottom line is also effectively the same: a downward correction is to be expected as the current euphoria finds a terminal point upon traders’ rediscovery of the timid growth forecasts for this and next year. Equity prices remain the indicator to watch, with a meaningful reversal there likely to coincide with a downward correction in NZDUSD. Indeed, the pair is now 86.7% correlated with the MSCI World Stock Index.
[B]What is Purchasing Power Parity?[/B]
One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.