NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

[B]New Zealand Dollar / US Dollar Monthly Technical Forecast[/B]

While the recent break to fresh 2009 highs beyond 0.6590 keeps the bullish structure intact and confirms a medium-term higher low by 0.6200, any additional gains from here are ultimately seen limited with the market now retesting key longer-term former support turned resistance. As such, we would recommend looking to sell into rallies in the 0.6800 area in anticipation of a major pullback. A break below 0.6475 will help to confirm medium-term bearish outlook.

[B]New Zealand Dollar / US Dollar Interest Rate Forecast[/B]

The New Zealand Dollar/US Dollar currency pair likewise remains sensitive to interest rate differentials, and bearish forecasts for yields could have a negative effect on the NZDUSD. The New Zealand dollar currently enjoys a sizeable 225 basis point yield advantage over its US namesake, but interest rate traders anticipate that said spread will contract by 13 percent in a year’s time. We believe that interest rate-seeking speculators have bid the New Zealand dollar higher against the extremely low-yielding US Dollar. Any sign that the NZDUSD will no longer offer an impressive carry trade return could sink the Kiwi versus the US dollar. We have already seen the New Zealand dollar slip against its higher-yielding Australian counterpart.

[B]New Zealand Dollar / US Dollar Valuation Forecast[/B]

In a similar fashion to its Australian counterpart, the New Zealand Dollar has captured outsized gains at the expense of the greenback, driven higher by a hefty 95.7% correlation with surging global equities (as measured by the MSCI World Stock Index). Meanwhile, the fundamentals of the economy are decidedly grim. Indeed, Fitch downgraded New Zealand’s long-term credit outlook, expressing concern over the country’s medium-term growth outlook given its “persistently large current account deficit and rising foreign indebtedness”. The ratings powerhouse added that the volatility of the New Zealand Dollar complicates the necessary adjustments to the economy, with the currency “more responsive to global financial conditions than to domestic economic fundamentals.” Although a host of officials from the head of the central bank to the prime minister have tried talking down the currency, we have argued that a rate cut is the next logical step to create lower yield expectations and thereby help to decouple NZD from trends in risky assets. It remains to be seen whether this or an actual reversal in risk sentiment will prove to be the Kiwi dollar’s undoing, but a bearish bias with an eye to (eventually) exploit the currency’s growing overvaluation seems warranted regardless.

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What is Purchasing Power Parity?
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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.