New Zealand Dollar / US Dollar Monthly Technical Forecast
The commentary here is the same as with the Aud/Usd…..No sign of a let up just yet, with the market still very much trading within a bullish trend. We have already seen 7 consecutive positive monthly closes, and with the market just shy of critical psychological barriers at 0.7500, we could be on the verge of an eighth consecutive positive monthly close. However, while we do expect to see a test of 0.7500 at this point, the psychological barrier also coincides with the major 78.6% fib retracement off of the 2008 extreme high-lows, and as such, makes for an attractive counter-trend short opportunity. We think that the bull run is very near its end.
New Zealand Dollar / US Dollar Interest Rate Forecast
New Zealand Dollar / US Dollar Valuation Forecast
The outlook for the New Zealand Dollar is essentially the same as that for its Australian counterpart. The Kiwi has tremendous bullish momentum having outperformed the rest of the majors to add 12% against the greenback in the third quarter, and while its yield outlook is not as robust as that of the Aussie, it still easily trumps anything expected out of the Federal Reserve over the next 12 months. The pivotal question is the trend in risk appetite: NZDUSD shows a hefty 95.2% correlation with the MSCI World Stock Index, meaning the currency may sink despite past performance and higher yields as safety-seeking flows elevate the greenback. The Kiwi has steadily advanced for seven months despite well-known reservations about the durability of the global economic recovery, so a downturn in confidence must be viewed as the risk rather than the base scenario, making it likely that prices will get more overvalued before a correction materializes.
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.
Written by Joel Kruger, Technical Currency Strategist; John Rivera, Currency Analyst; Ilya Spivak, Currency Analyst for DailyFX.com