[B][B]New Zealand Dollar / US Dollar Monthly Technical Forecast[/B][/B]
After rolling over just shy of the 61.8% retracement of the decline from above .8200, the NZDUSD is testing well defined channel support. The divergence theme continues as evidenced by the position of slow stochastics at the last high. As my colleague, Joel S. Krueger, mentioned last month - former support in the late summer / early fall of 2007 is now resistance near current levels.
The New Zealand Dollar/US Dollar has seen its yield spread turn positive as interest rate expectations for the two economies moved in opposite directions during August. Overnight Index Swaps are pricing in 105 bps of rate hikes over the next twelve months for the RBNZ which is up from 80, while Fed expectations have slipped to 80 from 93. This could be a bullish development for the pair given interest rate expectations strong influence on the pair. However, we have seen OIS expectations decline from a peak of 119 as the outlook for a global recovery has dimmed. Risk appetite and commodity prices remain the main drivers of price action for the pair and should be monitored.
[B][B]New Zealand Dollar / US Dollar Valuation Forecast[/B][/B]
[B]NZDUSD Valuation Forecast: [/B][B]Bearish[/B]
The New Zealand Dollar has captured outsized gains against the greenback in August, rising by a hefty 2.5%. Things look a bit less rosy this time around, however, with any reversal in risk appetite to weigh heavily on the Kiwi via the formidable 94.5% correlation between NZDUSD and the MSCI World Stock Index. Further, the fundamental picture remains decidedly grim: Fitch downgraded New Zealand’s long-term credit outlook on concern over the country’s medium-term growth prospects given its “persistently large current account deficit and rising foreign indebtedness”; meanwhile, the central bank seems firmly committed to a dovish posture, saying they “expect to keep [interest rates] at or below the current level through…the latter part of 2010.” NZDUSD has pushed quite far into overvalued territory in recent months, with the bears now seemingly on the cusp of a promising selling opportunity.
[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 Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.