New Zealand Dollar Forecasts for January

NZDUSD Long-Term Technical Forecast

The NZDUSD count from the top is not nearly as clear as the AUDUSD count. Still, the decline displays many qualities of an impulse such as an extended middle section which divides into 5 waves. Divergence with RSI on the weekly along with the indicator moving up through 30 supports a larger recovery.

NZDUSD Fundamental Outlook/Interest Rate Forecast

New Zealand's interest rate outlook is quite similar to that of Australia, and the New Zealand dollar stands to lose a substantial portion of its interest rate advantage against the US dollar and other forex counterparts. Indeed, the NZD-USD yield differential is predicted to shrink by 74 basis points in the coming year-that which would leave the highly yield-sensitive NZD at a clear disadvantage through the medium/long term. Outlook for the New Zealand dollar remains bearish from an interest rate perspective. Likewise significant, current financial market conditions may continue to punish the risk-sensitive New Zealand dollar.

New Zealand Dollar/US Dollar Valuation Forecast

NZDUSD Valuation Forecast: Neutral

Heavy selling saw the New Zealand dollar overshoot its target PPP value. Current positioning sees Kiwi still substantially undervalued against the greenback. A correction may be ahead as NZDUSD saw respectable upside momentum in December, though interest rate considerations are not supportive with substantially more rate cuts being priced in for the next 12 months. Importantly, RBNZ Governor Alan Bollard has said that he sees the economy resuming growth in the second half of 2009 and backed off explicit promises of further rate cuts. Although overnight index swaps show the market is unconvinced at the moment, a "no change" rate decision in January may bring on a change of heart. Indeed, traders have pared bets on the magnitude of January's expected easing by a full 51% in recent weeks. On balance, this may give the bulls a window of opportunity to push NZDUSD higher towards PPP levels.

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.

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