BofA sees dollar weakness continuing with New Zealand dollar gains

Investing.com -- Bank of America analysts said the US dollar downtrend has gained momentum, with multiple technical and fundamental indicators pointing to further weakness.

The bank's quantitative signals support the continuation of the dollar's decline. Option flows favored dollar puts across several major currency pairs last week, while skew moved in favor of dollar downside across both developed and emerging markets. Trend signals remain negative, with at least one bearish dollar signal triggered in six of the nine currency pairs in the bank's technical matrix.

The fundamentals increasingly support this movement. Recent labor and inflation data have reduced the risk of a Federal Reserve interest rate increase in September. Bank of America noted that while the Jackson Hole symposium will be important for understanding the Fed's future strategy, a weaker dollar appears to be the path of least resistance.

The bank's analysis favors a stronger New Zealand dollar against the weaker US dollar. Starting the week of August 17, the NZD/USD pair broke above the trailing 10-day highs at 0.5908. Option flow and skew both supported New Zealand dollar calls last week, and the uptrend is backed by a positive ADX trend indicator.

The recent dollar sell-off is largely driven by interest rate expectations. The New Zealand dollar appears attractive as one of the currencies that may benefit most from tighter rate differentials, according to the bank.

Bank of America also noted that with the value factor currently outperforming, the New Zealand dollar does not appear materially overvalued versus the US dollar on any metric, unlike the Australian dollar.

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