AUD/NZD: Plenty of upside scope for the pair - Westpac

Sean Callow, Research Analyst at Westpac, suggests that relative commodity prices have been arguing for stronger AUD/NZD for months but it took the RBNZ’s meeting this month to fuel a break of 1.06 for the first time since November.

Key Quotes

“The RBNZ remains upbeat on New Zealand’s economy – with good reason – but Governor Wheeler again warned about international risks (including US protectionism) and chided markets for pricing in a rate hike this year. AUD/NZD has rallied 3 cents since this statement.”

“But fair value estimates were already above 1.10 even when markets were fully priced for an RBNZ rate hike by Nov 2017. AUD/NZD has diverged notably from yield spreads since about mid-2016.”

“While the persistence of AUD/NZD below our fair value estimates (now 1.12-1.13) argues for patience, it seems there is still plenty of upside scope for the pair. With support near term from iron ore and coal prices outperforming dairy, AUD/NZD should break important resistance at 1.0765. This would place the pair on track for substantial further gains, with a multi-month target of 1.10.”