New Zealand Dollar US Dollar Exchange Rate Forecast

New Zealand Dollar / US Dollar Monthly Technical Forecast



The market has been having a hard time extending gains over the past couple of weeks, with the rally out from the multi-year 2009 lows by 0.4895 finally stalling out by 0.6600. This topside failure by 0.6600 also coincides with the 50% fib retrace off of the major 0.8215-0.4895 2008-2009 move and we look for a medium-term lower top to now carve out ahead of a resumption of the broader downtrend over the coming weeks. The 10-Week SMA has managed to support much of the up-move off of the 2009 lows and a close below the moving average will be used as a gauge for confirmation and an official bearish shift in the structure. A weekly close back above 0.6600 will however negate and open a fresh recovery rally.


New Zealand Dollar / US Dollar Interest Rate Forecast



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 16 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.


New Zealand Dollar / US Dollar Valuation Forecast



In a similar fashion to its Australian counterpart, the New Zealand Dollar is showing signs of topping having reached deep into overvalued territory as capital shifted out of safety and back into risky assets in the four months through June. The bottom line is also effectively the same: risk trends are the indicator to watch as stocks show signs of a looming bearish reversal having started July at the highest level relative to earnings since August 2004. A meaningful reversal there is likely to coincide with a downward correction in NZDUSD. Indeed, the pair is now is now 91.5% correlated with the Dow Jones Industrial Average and 92.8% correlated with the broader MSCI World Stock Index (using a 90-day rolling correlation).

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.