NZDUSD Monthly Technical Forecast
The pair has dropped to fresh multi-year lows in the early hours of trade in March with the market now eyeing a direct retest of the 78.6% fib retracement off of the major 0.3895-0.8215 2000-2008 move at 0.4800. Below the latter initially exposes 0.4485 (August 2002 low) and ultimately the all-time lows by 0.3895 further down. A long-term lower top has now been confirmed by 0.6130 (November 2008 high), and we look for the fresh drop to challenge the all-time lows over the coming months. Only back above 0.6130 would negate. In the interim, look for February's high by 0.5450 to cap gains. It is however worth noting that the monthly RSI is very oversold which often warns of an impending reversal. As such, we would recommend that long-term bears proceed with caution at current levels.
NZDUSD Fundamental Outlook/Interest Rate Forecast
New Zealand’s interest rate outlook remains negative despite a small improvement on the back of the RBA rate hold. Regardless, the spread between the expectations for the RBNZ cash target and the Fed Funds Rate is at -128 which is a strong bearish signal for the NZD/USD. Like most pairs the greenback’s strong correlation to risk sentiment has overshadowed other factors, but if fundamental drivers regain their importance the declining interest rate outlook could become more of a weighing factor. At the very least the declining interest rate differential will limit any upside potential for the New Zealand Dollar.
New Zealand Dollar – US Dollar Valuation Forecast
The value gap for the New Zealand dollar fell considerably during the month, and the high-yielding currency lost its title as the most undervalued of the major currencies after slipping 0.63% against the greenback. Even thought the NZDUSD remains heavily oversold in terms of fair value pricing, as the Reserve Bank of New Zealand is anticipated to lower the cash rate in March, expectations for further easing in policy is likely to weigh on the exchange rate. Meanwhile, as risk trends continue to dictate price action in the foreign exchange markets, the kiwi-dollar is likely to push lower over the near-term as investors remain risk adverse, and the high-yielding currency is likely to stay undervalued against the U.S. dollar over the coming months.
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 overvalued against the Dollar are denoted in RED, while those that are undervalued are denoted in GREEN.
