The NZDUSD count from the top is not nearly as clear as the AUDUSD count but the two tend to trade in tandem. Additional evidence favors a NZDUSD recovery this month, especially the quintuple divergence with RSI on the daily. Initial resistance is above .60, which is former congestion and the 38.2% (at .6183) of the decline from .8219.
New Zealand's interest rate outlook is quite similar to that of Australia, and the New Zealand dollar stands to lose a substantial portion of its interest rate advantage against the US dollar and other forex counterparts. Indeed, the NZD-USD yield differential is predicted to shrink by 2.32 percentage points in the coming year-that which would leave the highly yield-sensitive NZD at a clear disadvantage through the medium/long term. Outlook for the New Zealand dollar remains bearish from an interest rate perspective. Likewise significant, current financial market conditions may continue to punish the risk-sensitive New Zealand dollar.
NZDUSD Valuation Forecast: Bullish
The New Zealand dollar has overshot its target PPP value to an even greater extent than its Australian counterpart. The Kiwi is now nearly one thousand pips undervalued against the greenback, with momentum against NZDUSD after the pair declined a considerable 1.01% last months. Interest rate considerations are also not supportive, with substantially more rate cuts being priced in for the next 12 months. All told, the Kiwi is likely to push further into undervalued territory before a meaningful correction materializes.
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 the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar. Currencies overvalued against the Dollar are denoted in RED, while those that are undervalued are denoted in GREEN.