Jason Wong, Currency Strategist at BNZ, suggests that over the long-term the path of the NZD is largely driven by inflation differentials, as outlined by the theory of purchasing power parity. Key Quotes “It is remarkable how this simple theory can explain the “trend” in the NZD. Our CPI-based PPP estimates are at the upper-band of long-term fair value estimates compared to other price-based measures, such as those using unit labour costs or GDP deflators. On this basis the PPP NZD/USD exchange rate is around USD0.61 while the PPP NZD/AUD exchange rate is around AUD0.86. Our current long-term PPP estimates are USD0.69 and AUD0.91. Based on CPI inflation returning back to targets in a few years and historical figures dropping out of the calculation, our PPP estimates gradually rise to USD0.72 and AUD0.93 over a long period of time.” For more information, read our latest forex news.