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NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

2011-03-09 15:27:00
Joel Kruger, David Rodriguez, Ilya Spivak,
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New Zealand Dollar / US Dollar Monthly Technical Forecast

Weekly Chart

NZDUSD_New_Zealand_Dollar_US_Dollar_Exchange_Rate_Forecast_body_nzd2.png, NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

Prepared by Joel Kruger

The market looks to be attempting to carve out a meaningful top and we look for a break and weekly close back below key support at 0.7340 for confirmation of the trend shift. A weekly close below 0.7340 should then open the door for a fresh downside extension exposing critical medium-term support at 0.6560 over the coming weeks. A weekly close back above 0.7550 however, delays bearish prospects.

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

Signal

1-Year Expectations(Basis Points)

5

35

(30)

Bearish

Yield in 1 Year(Percent)

3.05

0.60

2.45

Bullish

NZDUSD_New_Zealand_Dollar_US_Dollar_Exchange_Rate_Forecast_body_Picture_2.png, NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

Natural disaster in New Zealand has forced a substantial correction in interest rate forecasts and commensurate declines in the New Zealand currency. Markets now predict that the Reserve Bank of New Zealand will cut interest rates by at least 25 basis points at their upcoming meeting, while the central bank is likely to leave interest rates roughly unchanged in the coming 12 months. Though US Dollar interest rate expectations hardly call for aggressive interest rate increases, subdued RBNZ expectations have had a particularly large effect on the yield-sensitive currency.

It remains to be seen whether recent events will be enough to keep the RBNZ on an interest rate cutting cycle through the foreseeable future. We suspect that the coming months of New Zealand economic data and RBNZ rhetoric may prove especially pivotal for the historically higher-yielding New Zealand Dollar.

New Zealand Dollar / US Dollar Valuation Forecast

NZDUSD Valuation Forecast: Bearish

NZDUSD_New_Zealand_Dollar_US_Dollar_Exchange_Rate_Forecast_body_03092011_NZD.png, NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

The Kiwi has undergone what appears to be a tectonic shift in outlook through February, with rate hike expectations virtually evaporating after a debilitating earthquake in Christchurch – the largest in 80 years – sent the economy into a tailspin. The currency remains firmly overvalued however, trading at a 23.2 percent premium to PPP-implied fair value, suggesting positioning remains highly attractive to express a long-term bearish bias as a narrowing yield gap eats away at the current disparity. As with the Aussie, the reemergence of Euro Zone debt fears and lingering turmoil in the Middle East compound downward pressure on the risk-linked currency.

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.

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