NZ Dollar Exchange Rates Forecast Higher as Markets Gear up For Yet More Interest Rate Rises

The forecast confirms to us that more potential gains in the currency are now possible. But why has the New Zealand dollar strengthened? It all lies with interest rates, and importantly, forecasted rate rises.

A look at the day-on-day changes in the FX markets:

• The pound to NZ dollar exchange rate (GBP/NZD) is 0.5 pct higher at 1.9590. (We are seeing some strong interest in sterling following the announcement that interest rates in the UK will rise sooner than markets are currently pricing in).
• The euro to NZD is 0.37 pct higher at 1.5666.
• The NZD to US dollar exchange rate is 0.21 pct lower at 0.8672.
• The Aus dollar to NZ dollar is 0.16 pct lower at 0.9412.

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Why is the Kiwi dollar stronger?

As predicted, the Reserve Bank of New Zealand (RBNZ) raised interest rates by 25bp. This was expected and is not in itself the source of the NZD rally.

Rather, it is expectations for further interest rate hikes that have markets buying.

Kathy Lien at BK Asset Management tells us:

"Investors are piling back into the long NZD trade because not only did the RBNZ tighten, but they said rates will need to return to a more neutral level, which reflects their commitment to additional tightening.  

"The tone of the RBNZ statement was relatively positive with Wheeler saying there's strong momentum in the economy and signs of inflation."

Forecast: Where next for the Kiwi?

According to Lien, further gains in the NZ exchange rate complex should be expected:

"NZD should extend higher on the back of the RBNZ's hawkish monetary policy stance.  A move to 87 cents for NZD/USD is likely but stronger gains should be seen versus the euro, Japanese Yen, Canadian and Australia dollars."

Should those holding out to buy the New Zealand dollar at better rates rather sit on the sidelines and hope for a recovery rally?

At present we would suggest that a relief rally is not necessarily on the cards.

Against the pound sterling, a look at the weekly GBP/NZD chart shows the Relative Strength Index (RSI) to be at 45.9. We would consider the pair to be oversold should the RSI be at or below 30.

The RSI is a popular indicator amongst analysts for determining whether a pullback is nigh.

However, on a daily basis the RSI is at 33.9, what this suggests is that any relief rallies should be shallow and confined to the near-dated timeframes.

With rate differentials playing such an important role in global currency valuations the fact that New Zealand is well ahead on the rate cycle will surely only confirm the bullish forecast on the kiwi.