NZDUSD Monthly Technical Forecast
Bottom line; the NZDUSD is bearish as long as price is below .6090. There are 5 waves down from that level, indicating that the long term trend remains down. An expanded flat correction has unfolded from the February 2 low (.4958). Wave c is in 5 waves, RSI is divergent and in overbought territory on the daily so expect weakness to resume soon. An unexpected rally above .6090 exposes the 50% retracement of the decline from .8219-.4890, at .6340.
NZDUSD Fundamental Outlook/Interest Rate Forecast
New Zealand’s interest rate outlook has improved significantly following the RBNZ’s decision to cut rates to 3.00%. Overnight index swaps are only calling for 6 more basis points in cuts which have narrowed the yield spread to -39 from -128. Given the strong correlation between the pair and interest rate outlook we could see the recent “Kiwi” bullish momentum continue. Rising commodity prices have also been a main driver of the currency’s price action and that relationship is expected to continue in April.
New Zealand Dollar – US Dollar Valuation Forecast
The bottom line for the New Zealand Dollar aligned with expectations for its Australian counterpart: NZDUSD is close to parity with its PPP-implied exchange rate, meaning the pair does not offer a tangle mispricing to exploit as yet. As with the Aussie, the pair’s close correlation with risky assets means that any fallout in the market’s confidence will mean another swing into undervalued territory. Also like the Aussie, the New Zealand unit may benefit from quantitative easing by other central banks if those policies are mismanaged and produce ballooning inflationary pressure, making NZD attractive as a source of yield and as a store of value. For the moment however, we remain on the sidelines until a substantial imbalance is set to be exploited.
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.
