nzd fundamentals

New Zealand Dollar - US Dollar Exchange Rate Forecast

Tuesday, 03 February 2009 19:05:42 GMT  |  Jamie Saettele, Senior Currency Strategist; David Rodriguez, Quantitative Analyst; Ilya Spivak, Currency Analyst

New Zealand Dollar - US Dollar Monthly Technical Forecast

The NZDUSD bear is alive and well. Like the AUDUSD, the NZDUSD decline from its 2008 high was an impulse (5 waves) and the subsequent advance was shallow and corrective. Unlike the AUDUSD, the NZDUSD decline from .6090 was also impulsive and broke below the late 2008 low of .5186. This confirms that a secondary top is in place at .6090. A rally towards resistance in the .5380-.5551 zone is probable prior to resumption of the downtrend, which could eventually test the 2000 low at .3895.

New Zealand Dollar - US Dollar Interest Rate Forecast

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 a whopping 142 basis 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.

New Zealand Dollar - US Dollar Valuation Forecast

The outlook for the New Zealand Dollar is much the same as that of its Australian counterpart. While the Kiwi is the most undervalued of the major currencies against the US Dollar, it also faces the greatest erosion in yield differentials and was the worst performer against USD in the preceding month. Indeed, NZDUSD lost a whopping 12.5% through January. While the currency looks cheap, it is likely to be even more so before a bullish correction can build meaningful momentum.

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.

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