AUD/NZD: Increasingly undervalued - Westpac

Sean Callow, analyst at Westpac, notes that the AUD/NZD has started this year drifting higher, reducing what Westpac estimates to be its prolonged undervaluation, but this rally was punctured on 23 January by New Zealand’s firmer than expected Q4 inflation data.

Key Quotes

“Relative commodity prices remain a key source of support for AUD/NZD. While dairy auction prices have risen lately, the surge in iron ore prices to 2 year highs is even more striking. Overall, we estimate that AUD/NZD is increasingly undervalued, suggesting a bias to buy dips rather than sell rallies multi-week.”

“But the aggressive pricing for RBA easing seems likely to constrain AUD/NZD rallies for some time. Moreover, price action indicates AUD is preferred to NZD as the proxy for the state of US-China trade relations. This suggests that AUD/NZD will be wary as talks continue ahead of the 1 March deadline, but a deal of some description (which we expect) could see the pair commence a rally towards 1.08 multi-week.”