NZDUSD Monthly Technical Forecast
Recent rallies in March and April, though impressive, have failed to break above the 2009 highs by 0.6035, leaving the overall structure still grossly bearish. We look for the 0.6035-0.6085 area to continue to cap gains ahead of a resumption of setbacks back towards the 0.5200 over the coming weeks. In the interim, the key level to watch below comes in by 0.5485 with a break below this level to reaffirm bearish bias. Back above 0.6085 however, will negate and shift structure.
NZDUSD Fundamental Outlook/Interest Rate Forecast
As the second-highest yielding G10 currency, the New Zealand dollar remains highly sensitive to domestic interest rate developments. The clear improvement in global risk sentiment has meant that investors now seek the attractive carry returns in the NZD/USD and NZD/JPY, and general risk-seeking behavior clearly bodes well for the high-yielder. The Reserve Bank of New Zealand has likewise placated NZD traders by showing comparatively little willingness to slash interest rates further; Overnight Index Swaps predict the RBNZ will leave rates unchanged in the coming 12 months.
Our interest rate-based New Zealand dollar forecast is bullish, but it likewise remains critical to watch general financial market trends as they relate to the NZD. A sharp deterioration in financial market conditions could easily erase much of the NZD/USD’s recent gains.
New Zealand Dollar – US Dollar Valuation Forecast
April saw the New Zealand Dollar come even closer to parity with its PPP-implied exchange rate, meaning the pair does not offer a tangle mispricing to exploit as yet. Although it would be tempting to say the smaller antipodean currency is likely to behave akin to its larger counterpart, it is critical to note that NZDUSD significantly underperformed AUDUSD last month, rising just 0.33% as compared to he latter’s formidable 4.48% advance. If the rebound is risky assets is failing to offer the Kiwi adequate support, expectations of a slower path back to monetary tightening than that of the US could see the pair move back into substantially undervalued territory in the months ahead.
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 the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar. Currencies pairs that are undervalued against their PPP exchange rate have the size of the value gap denoted in RED, while those that are overvalued are denoted in GREEN.
