AUD/NZD is just marginally below fair value – Westpac

Sean Callow, Research Analyst at Westpac, suggests that their short term fair value estimate of AUD/NZD has not been below 1.10 since July 2016 and rose as high as 1.15 in November before easing back to 1.13 by late March 2017, cooling slightly in line with coking coal and iron ore prices.

Key Quotes

“The gap between the spot rate and 1.13 fair value is a function of both yield spreads and relative commodity prices.”

“This is key to our expectation that AUD/NZD will resume its up trend in coming weeks, though we don’t expect the gap to be fully closed any time soon. 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, though the narrowing of the gap in recent weeks increases our confidence in the model estimate.”