AUD/NZD still below fair value – Westpac

Sean Callow, Research Analyst at Westpac suggests that the recovery in Australia’s export prices since June has boosted their fair value estimate of AUD/NZD cross to 1.10-1.12 which depicts that the cross is still below its fair value.

Key Quotes

“Our short term fair value estimate of AUD/NZD fell as far as the high 1.07s in June as iron ore prices fell to around $55/tonne. Around this time, AUD/NZD probed under 1.04, printing lows since January and sparking the usual analyst extrapolations towards parity.”

“Fair value estimates are always a simplification of a currency pair’s fundamental drivers, so deviations from the spot rate can persist for some time.”

“The current phase of AUD/NZD undervaluation has been both unusually large and sustained, but the narrowing of the gap in recent months increases our confidence in the model estimate.”

“Relative commodity prices are likely to be more important than interest rates in driving our AUD/NZD fair value estimates in coming months. The role of risk indicators on the cross is somewhat fluid but lately the kiwi has underperformed when e.g. the VIX Index has risen.”