AUD/NZD now only 2% below fair value – Westpac

Sean Callow, Research Analyst at Westpac, explains that a sharp deterioration in relative commodity prices has slashed their AUD/NZD fair value estimate to below 1.10 for the first time since August 2016, now around 1.0950 which suggests that AUD/NZD is only 2% below its fair value.

Key Quotes

“Our short term fair value estimate of AUD/NZD rose as high as 1.15 in November and was still above 1.13 in March 2017. This produced historically large gaps between spot and fair value of up to 7-8 cents.”

“But a sharp deterioration in relative commodity prices has slashed our fair value estimate to below 1.10 for the first time since August 2016, now around 1.0950.”

“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.”

“Rising steel prices suggest upside potential for iron ore prices near term. This would support the AUD/NZD spot rate but also the fair value estimate so the gap may not narrow much further.”