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NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

2011-10-06 17:37:00
Joel Kruger, Technical Strategist, David Rodriguez, Quantitative Strategist, and Ilya Spivak, Currency Strategist,
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Monthly Chart

New_Zealand_Dollar_US_Dollar_Exchange_Rate_Forecast_body_EUR10.png, NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

Prepared by Joel Kruger

The market is finally confirming the formation of a major top by post float record highs set back in the summer at 0.8845, with the latest break back below 0.8000 confirming our bearish outlook and opening the door for more significant declines going forward. From here we look for any rallies to be well capped below 0.8000 on a weekly close basis, with a break below 0.7100 to accelerate declines and expose 0.6600 further down.

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)

13

10

3

Bullish

Yield in 1 Year(Percent)

2.63

0.35

2.28

Bullish

New_Zealand_Dollar_US_Dollar_Exchange_Rate_Forecast_body_Picture_6.png, NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

New Zealand Dollar / US Dollar Interest Rate Trading Bias: Bullish

A significant downgrade in Reserve Bank of New Zealand interest rate expectations led to similar New Zealand Dollar weakness, and any further deterioration could drive continued NZDUSD declines. The shorter-term question becomes: can yield forecasts fall further? Thus far markets put low odds of RBNZ rate cuts through the coming 12 months, while the same Credit Suisse Overnight Index Swaps predict that the Reserve Bank of Australia will slash interest rates by 1.54% through the same stretch.

Much like its Australian counterpart, the NZDUSD trades quite closely with the Dow Jones Industrial Average and broader risk sentiment. Watch moves in the Dow and financial markets to drive Kiwi Dollar volatility. Else monitor rhetoric from the domestic central bank and guidance on future interest rate changes.

New Zealand Dollar / US Dollar Valuation Forecast

NZDUSD Valuation Forecast: Bearish

New_Zealand_Dollar_US_Dollar_Exchange_Rate_Forecast_body_Picture_7.png, NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

Source: Bloomberg

As with its Australian counterpart, the Kiwi remains highly overvalued and also appears vulnerable to a correction as deteriorating global economic growth expectations and the lingering EU debt crisis weigh on the sentiment-linked currency. The interest rate hike outlook that had previously insulated the Kiwi from aggressive selling has faded, with markets no longer pricing in any tightening over coming year. On balance, the door appears open to further selling.

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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