NZD/AUD: 0.97-0.98 area to remain a significant barrier during the year ahead - Westpac

Imre Speizer, Research Analyst at Westpac, notes that NZD/AUD ended 2016 little changed (+1% net over the year) and during the second half whispers of parity were again heard in market circles but ultimately the 0.97-0.98 area held.

Key Quotes

“We expect that area to remain a significant barrier during the year ahead.”

“Technically there’s a case for a move lower during the next few months, towards a “neckline” at 0.9280.”

On a more” fundamental note, the cross has failed to keep pace with declines in its main determinants.”

“Incorporating these determinants into a NZD/AUD fair value model, along with risk sentiment proxies, yields a valuation which is considerably below the actual traded level. Currently, the cross should be trading closer to 0.8900 than 0.9500. This misvaluation is the largest since our model started in 2003.”

“One explanation for this misvaluation is that the AUD has been treated harshly by markets, our AUD/USD fair value model estimating the AUD is significantly cheap. The AUD’s identity as a freely floating risk proxy in a market concerned about central bank fuelled asset prices, Trump’s likely positions on trade, China, higher Fed and bond rates, European elections and Brexit at least partly explains why the AUD has been downtrodden.”

“Looking ahead, the AUD has scope to more fully price in the positive bulk commodities story which was most recently evidenced in the Dec trade data. A reduction in misvaluation and decline in NZD/AUD to 0.93 during the next few months is our base case.”