New Zealand Dollar US Dollar Exchange Rate Forecast

The NZDUSD is in a situation similar to that of the AUDUSD. There is the potential for a move through 7640 before a more meaningful top forms. Potential resistance on a break above 7640 is 7840, which is the 161.8% extension of the 6560-7165 rally.

New Zealand Dollar / US Dollar Interest Rate Forecast

The RBNZ unlike its antipode counterpart is just at the beginning of its tightening cycle with overnight index swaps pricing in another 80 bps in rate hikes. The “kiwi’s” 64 bps spread over the dollar points to additional gains for the NZD/USD as long as risk appetite cooperates. The com-dollar is equally sensitive to broader trends and a diming outlook for global growth could easily derail its current rally. Additionally, we saw Governor Bollard try and downplay the strength of the New Zealand economy and dim the outlook for future tightening, stating that “the pace and extent of further Official Cash Rate increases is likely to be more moderate than was projected in the June Statement."

New Zealand Dollar / US Dollar Valuation Forecast

NZDUSD Valuation Forecast: Bearish

The New Zealand Dollar is trading at its most overvalued in eight months, tracking just above the 20 percent extreme boundary and over 1500 pips above its PPP-implied fair exchange rate. Although RBNZ rate hike expectations are the most robust among the majors, they have also decreased substantially, with a Credit Suisse gauge of the priced-in tightening outlook for the coming year now at the lowest in 11 months. A close correlation to stock performance adds to vulnerability as cost-cutting becomes increasingly insufficient to produce earnings growth amid lackluster revenues. On balance, a selling opportunity seems likely ahead.

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.