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NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

NZDUSD: New Zealand Dollar US Dollar Exchange Rate Forecast

2011-12-07 06:41:00
Jamie Saettele, CMT, David Rodriguez, Ilya Spivak,
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New Zealand Dollar / US Dollar Technical Forecast

Monthly Chart

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

Prepared by Jamie Saettele, CMT

The NZDUSD decline from the August high takes the form of a leading diagonal and composes the first leg of a larger decline. The implications for December and beginning of 2012 are for a correction of the decline. Leading diagonals often see sharp (of which this one is) and deep retracements. Resistance for the month is 8000 and 8240. Support is 7670.

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)

(1)

5

(6)

Bearish

Yield in 1 Year(Percent)

2.49

0.30

2.19

Bullish

NZDUSD_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: Neutral

Roughly equal interest rate forecasts for both the US Dollar and New Zealand Dollar leave our yield-based bias near neutral for the NZDUSD.

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.

Barring any significant shifts in rhetoric from the US Federal Reserve and/or Reserve Bank of New Zealand, we do not expect yields to play a large part in NZDUSD moves through the foreseeable future.

View a guide on trading currencies using interest rate expectations.

New Zealand Dollar / US Dollar Valuation Forecast

NZDUSD Valuation Forecast: Bearish

NZDUSD_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 (trading nearly 28 percent above its PPP-implied rate) and likewise appears vulnerable to a correction as deteriorating global economic growth expectations and the lingering Eurozone debt crisis weigh on market-wide sentiment. 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 a significant selloff.

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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