AUD/NZD seems to be under-priced overall - Westpac

Sean Callow, Research Analyst at Westpac, notes that the AUD/NZD started the year at 3 month lows below 1.04, for no apparent fundamental reason and the subsequent rally above 1.05 thus seems warranted, yet the pair remains a historically long way below Westpac’s fair value estimate, currently around 1.13.

Key Quotes

“Australia has returned to producing a trade surplus, with the steep rise in key commodity prices over the past year finally showing in official data. Iron ore prices remain strong though coal has lost momentum in recent weeks. For NZD, the rally in dairy prices has also been supportive but overall, relative commodity prices suggest AUD/NZD is cheap.”

“The sharpest contrast is arguably on domestic strength. New Zealand’s GDP jumped 1.1% in Q3 16, whereas Australia slid -0.5%. New Zealand unemployment is lower than in Australia and population growth faster. Markets are firm in pricing the RBNZ’s next move as a hike but not convinced on the RBA.”

“So we continue to see AUD/NZD as underpriced overall, but 1.0750 seems likely to be the extent of gains multiweek given the underlying strength of NZD sentiment.”