New Zealand dollar forecast & outlook: NZD predicted to outperform the Australia and US dollars

A look at the latest FX rates confirms the NZ dollar is maintaing its dominant position on the markets:

The pound sterling to New Zealand dollar exchange rate is 0.55 pct up on a day-to-day basis currently trading at 1.9239. The New Zealand dollar to US dollar rate is meanwhile 0.44 pct up at 0.8374.

The Australian to New Zealand exchange rate is meanwhile a shade lower at 1.1236.

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Forecasting the New Zealand dollar to outperform

The key driver to NZ dollar valuations in coming months will of course be policy at the Reserve Bank of New Zealand where the need to extend interest rates remains an issue.

With some of the highest interest rates in the G10 FX complex the New Zealand dollar will continue to benefit from foreign flows of money into the country as investors take advantage of NZ's superior yield profile.

"The RBNZ, will likely be one of the first central banks to raise rates next year, in order to curb rapid house price inflation," says Dieter Merz at MIG Bank, "as a result, the New Zealand dollar should remain rather strong."

Meanwhile, Australia is unlikely to raise rates as it would strengthen its currency and endanger the growth rebalancing process from the mining sector to the rest of the economy, which is very sensitive to interest rates and foreign exchange rates.

It is for this reason that Merz is forecasting the New Zealand dollar to outperform the Australian dollar: "there is scope for a test of the lows made in 2008 at 1.0648. Indeed, the recent sideways moves look like a declining triangle, favouring a continuation of the underlying downtrend. A break of the support at 1.1200 (01/08/2013 low) would confirm this scenario."

But Merz does caution that there could still be delays in the timing of rate hikes, even when the country is nursing an even more overvalued housing market.

Merz goes on to say:

"A too strong NZD could hurt the domestic economy through exporters, while the mortgage lending
restrictions, introduced on 1 October, are already showing some effects on the housing market.

"Meanwhile, since the RBNZ’s announcement on 12 September to raise rates next year, investors have pushed long NZD positions towards elevated levels. Therefore, the New Zealand dollar could suffer if markets perceive that the RBNZ is not in such a hurry to raise rates.

"Looking at the NZD/USD, a break of the recent low at 0.8169 (12/11/2013 low) would crystallise such deceptions in validating a bearish technical formation with a downside risk at 0.7844."