According to the BNZ Research Team, the NZD/USD pair will likely remain below but close to 0.7000 through to the end of next year.
“Our long-term fair value estimate has been creeping up over time. One year ago it sat at 0.7180 and two years ago it satat 0.6980. About one-fifth of the rise in long-term fair value reflects lower NZ CPI inflation compared to the US, and four fifths reflects our moving average filter. Fifteen years ago, the NZD sat below 0.60. As time passes, our methodology effectively down-weights this historical period and puts more weight on the more recent period. Based on our projections, long-term fair value is expected to settle around 0.74 over the next couple of years.”
“It is not hard to understand why the USD looks broadly overvalued. The US monetary policy tightening cycle is well ahead of other countries, reflecting tighter capacity constraints and higher inflationary pressure than other countries. The USD has been doing some of the heavy lifting to balance global growth conditions out.”
“As the US economic and policy cycle matures, we can expect to see the USD reverse course and fall on a broad basis. Under those conditions we’d expect to see the NZD move sustainably back above 0.70, in the absence of any major global shock. But the near-term outlook is for a sustained period well below our long term fair value estimate. We see NZD/USD spending much of the time hovering in the high 0.60s through to the end of next year.”