AUD/NZD: Trading below fair value - Westpac

According to Sean Callow, Research Analyst at Westpac, spot AUD/NZD has gyrated either side of their short term fair value estimate for the past year or so, recently slipping below fair value.

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 spot rally to above 1.12 in Oct 2017 produced the largest overvaluation since mid-2015. This looked to be driven by jitters over NZ politics, concerns which seem to have faded in FX markets at least.”

“Instead, AUD may now have a degree of political risk premium, as it has underperformed G10 currencies since the leadership change in August despite higher commodity prices and strong GDP data. A federal election is due by May 2019, before which AUD could struggle to shake off any risk premium.”

“The current AUD/NZD undervaluation indicated by this short term model at time of writing is about 3 cents (1.11 versus spot 1.08), not very stretched by historical standards.”