nzd-usd
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The NZDUSD has broken its support line, confirming a bearish reversal. Last month’s key reversal should not be ignored given that the pattern followed 7 consecutive up months. .6900 is potential support, followed by .6600 and then .6200.
The New Zealand Dollar/US Dollar currency pair likewise remains sensitive to interest rate differentials, and bullish forecasts for Reserve Bank of New Zealand interest rate policy has lead to commensurate NZD gains. Whether or not this may continue will almost certainly depend on the trajectory of global risky asset classes. The New Zealand Dollar currently enjoys a fairly substantial interest rate advantage over the US Dollar, and Overnight Index Swaps forecast that said yield spread will only grow in the coming 12 months. All else remaining equal, the New Zealand Dollar should strengthen versus its US namesake. Of course all else is never equal, and this will greatly depend on whether risky asset classes can continue higher through the foreseeable future.
As with its Australian counterpart, the New Zealand Dollar is not trading above the 20% upper extreme valuation threshold. Also in line with AUDUSD, risk trends are the key indicator to watch in the near term, with early clues pointing to a downward reversal beginning to emerge on global equity exchanges. Indeed, the MSCI World Stock Index dropped the most in since February while the VIX index of US stock options volatility that is often seen as a proxy for investors’ risk aversion rose the most in a year in October. The rate outlook may also not be as supportive as priced-in expectations are suggesting, with the RBNZ wary of the impact of a stronger currency on exports.
What is Purchasing Power Parity?
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.
Written by Ilya Spivak, Currency Analyst; David Rodríguez, Quantitative Strategist; Jamie Saettele, Senior Technical Strategist for DailyFX.com
DailyFX provides forex news on the economic reports and political events that influence the currency market.
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