A closer look at the monthly chart shows the market stalling by some formidable internal range resistance in the 0.7500 area and subsequently rolling back over. From here, we would expect to continue to see weakness, with deeper setbacks projected towards 0.6000 over the coming months. Any rallies should be very well capped ahead of 0.7200.
New Zealand Dollar / US Dollar Interest Rate Forecast
Overnight Index Swaps predict that New Zealand Dollar interest rates will remain comfortably above US Dollar equivalents through the coming year, and buoyant rate hike forecasts should theoretically support the NZD through medium-term trade. Unlike the Reserve Bank of Australia, the Reserve Bank of New Zealand has not yet begun to raise interest rates—leaving larger scope for higher yields through the coming 12 months.
All else remaining equal, this should boost the NZDUSD through the medium term. Yet all else is never equal, and it remains critical to monitor any and all shifts in financial markets and their effects on the risk-sensitive NZD.
New Zealand Dollar / US Dollar Valuation Forecast
The New Zealand Dollar is only second to its Australian counterpart in terms of overvaluation against the greenback, trading 13.7 percent above its “fair” exchange rate. However, a meaningful move lower may be stymied amid expectations that the RBNZ will begin to raise interest rates this month. Indeed, a Credit Suisse gauge of priced-in policy expectations shows traders see a 78 percent chance of a 25bps increase when Alan Bollard and company announce rates on June 9. That said, a renewed flare-up of risk aversion may prove to be a significant catalyst for near-term bearish momentum. With China proactively moving to slow its economy amid fears of asset bubbles and runaway inflation and the EU hamstrung, the US is left as the sole major driver of global economic recovery; if the States are unable to shoulder this burden and the rebound falters, renewed flight toward safe-haven assets promises to send the US Dollar higher, particularly against the risk-sensitive commodity currencies. On balance, the bias is bearish from a strict, valuation-based perspective but we will tread carefully as we monitor prices for selling opportunities.
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.
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