New Zealand Dollar US Dollar Exchange Rate Forecast

New Zealand Dollar / US Dollar Monthly Technical Forecast

Monthly Chart

Prepared by Joel Kruger

Currently locked in multi-month consolidation with a good portion of the price action largely confined to the 0.7000-0.7300 area. This consolidation follows a major corrective upside move from just under 0.5000 and we contend that the market is on the verge of ending the current consolidation ahead of the next major downside extension back below 0.6500 and towards 0.5000 over the coming months. Ultimately, a lower top is now sought out below 0.8200, by 0.7600, with only a break back above 0.7600 to negate bearish outlook and give reason for concern.

New Zealand Dollar / US Dollar Interest Rate Forecast

Our interest rate-based New Zealand Dollar bias is quite similar to that of the AUDUSD. The NZD maintains a fairly significant interest rate advantage over its US namesake, and current forecasts imply that this yield differential will actually grow in the next 12 months. All else remaining equal, we expect that said outlook will support the New Zealand Dollar through the foreseeable future. This may be partly contingent on the Reserve Bank of New Zealand’s next moves on whether or not to raise interest rates.

Recent bank rhetoric suggests that the RBNZ maintains a modestly hawkish/tightening bias—making its next actions particularly significant.

New Zealand Dollar / US Dollar Valuation Forecast

NZDUSD Valuation Forecast: Bearish

As with its Australian counterpart, the New Zealand Dollar is gravely overvalued against its US counterpart, trading above the upper positioning extreme at 20.1 percent above its PPP-implied fair value. Risk sentiment remains the dominant driver of price action, with NZDUSD continuing to show a strong correlation with the MSCI World Stock index. This points toward weakness ahead in the medium term amid increasing signs of a global economic slowdown on tap for the second half of the year, an outcome that is likely to sink shares and correlated currencies, including the Kiwi. Indeed, the JPMorgan Global PMI gauge of economic activity dropped to the lowest in six months in August.

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.