AUD/NZD: Remains undervalued despite last week’s pullback – Westpac

Analysts at Westpac point out that AUD/NZD fair value has recently fallen, from 1.15 in late October, to 1.12 currently.

Key Quotes

“Yield spreads have fallen mainly in response to the RBNZ’s “hawkish” surprise last week, but the disappointing AU jobs report also contributed. Commodity spreads have fallen due to 36% fall in iron ore prices since July against a 6% rise in dairy prices over that period.”

“The fall in fair value means the cross is not as extremely undervalued as it was (third chart), but it does remain undervalued. We attribute the undervaluation of the past 18 months to the US-China trade war. Recent thawing in that relationship has seen the undervaluation shrink slightly, but we see scope for it to shrink even further, taking the cross to around 1.10 over the next few months. We see last week’s pullback, should it extend to 1.0550, as an opportunity to buy the cross for a reversion towards fair value.”