New Zealand Dollar / US Dollar Monthly Technical Forecast

1/5/2011 Weekly Chart

NZDUSD_New_Zealand_Dollar_US_Dollar_Exchange_Rate_Forecast_body_nzd11.png, NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

Prepared by Joel Kruger

Although the market has rallied impressively from the recent 0.7345 lows, we view the price action as corrective and look for a fresh lower top to carve out somewhere ahead of the 0.7835 previous November minor peak, in favor of the next major drop. Look for a break and close back below 0.7500 to strengthen outlook and accelerate declines towards 0.7345 and beyond. Only a close back above 0.7835 negates.

New Zealand Dollar / US Dollar Interest Rate Forecast

Currency, Central Bank

New Zealand DollarReserve Bank of New Zealand

US Dollar, US Federal Reserve

Net NZDUSD Spread


1-Year Expectations(Basis Points)





Yield in 1 Year(Percent)





NZDUSD_New_Zealand_Dollar_US_Dollar_Exchange_Rate_Forecast_body_Picture_21.png, NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

The New Zealand Dollar saw its yield advantage over its U.S. namesake shrink to 32 bps from 46 bps the month prior. Concerns over the antipodes banking system and the economic impact from a major earthquake have dimed the outlook for further tightening. Nevertheless, the Kiwi holds the second highest interest rate advantage of the majors which could spell further strength for the commodity dollar. Overstretched commodity prices could lead to a retracement which may weigh on the NZD/USD, preventing the pair from testing its yearly highs as its fellow com-dollars have done recently.

New Zealand Dollar / US Dollar Valuation Forecast

NZDUSD Valuation Forecast: Bearish

NZDUSD_New_Zealand_Dollar_US_Dollar_Exchange_Rate_Forecast_body_01042011_NZD.png, NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

The Kiwi dollar remains deeply overvalued against its US counterpart, with spot trading at a 24.8 percent premium to the PPP-implied “fair” exchange rate. Unlike the Aussie however, NZDUSD seems to have decoupled from trends in underlying risk sentiment (as tracked by the MSCI World Stock Index), with monetary policy expectations taking on a dominant role in driving price action. While consensus forecasts point to a robust 75 basis point shift in the spread between benchmark interest rates in favor of the Kiwi, traders are pricing in no rate hikes in January, hinting at some room for a correction lower as US yields march higher, reflecting emerging expectations that growth in the world’s largest economy will outpace that of its G10 counterparts in 2011.

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.