NZDUSD has been on a tear lately, pushing impressively back above the 0.8000 level. The drivers for the rally suggest that the currency pair is fairly priced for now, but the rally may have a hard time from here.
I modelled NZDUSD based on two basic inputs – the 2-year interest rate spread and the S&P500, both of which are normally positively correlated with the NZUSD rate. Doing so suggests that the pair is relatively fairly priced. The interest rate spread has actually widened considerably lately as the market has gone from expecting an RBNZ cut to actually pricing in a partial hike for the coming 12 months. Meanwhile, the deteriorating US data has the market looking more aggressively for Fed QE, a development that doesn’t really appear in the spread due to the zero-interest rate bound in the US and the distortions of Operation Twist. On the equity market front, the very strong stock market is NZD supportive relative to the USD. The question going forward is how much longer the market will enthuse about the Fed punchbowl prospects in the face of weak data and whether a possibly deteriorating corporate earnings environment might serve to dampen enthusiasm for risk assets.
Chart: NZDUSD
On a technical basis, the pair is still in a long term range and looks structurally toppish if we stay below the descending trendline. The big focus lower is the rising neckline-like area, with perhaps the 55-day moving average (or 11-week in this case, in red) as a short term pivot area. Stay tuned.
John J Hardy,
SAXO BANK