AUD/NZD fair value steadying around 1.08 – Westpac

Westpac’s short term fair value estimate of AUD/NZD rose as high as 1.15 in November and was still around 1.13- 1.14 in April 2017 which produced historically wide gaps between spot and fair value, but a sharp deterioration in relative commodity prices cut 6 cents off their fair value estimate between mid-April and early June, now around 1.08, according to Sean Callow, Research Analyst at Westpac.

Key quotes

“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.”

“An improving global economy offers hope for some improvement in Australia’s export prices in the weeks ahead. This would support the AUD/NZD spot rate but also the fair value estimate so the gap may not narrow much further.”