CBA: AUD/NZD Can Recover In ‘23

CBA note that their “AUD/NZD fair value model suggests fair value is currently in a range of NZ$1.09‑1.18, centered on 1.09. With AUD/NZD spot currently near NZ$1.06, AUD/NZD is undervalued.”

• “More negative interest rate differentials and a fall in China’s manufacturing PMI has pulled AUD/NZD fair value lower in recent quarters. Nevertheless, Australian commodity prices are much higher than New Zealand’s. Australia’s relatively higher commodity prices largely explains the current divergence between AUD/NZD spot and our estimate of fair value.”
• “AUD/NZD can re‑strengthen in 2023.”
• “We expect the low point for AUD/NZD in this cycle will coincide with China meaningfully relaxing its covid restrictions. The removal of covid restrictions will clear the way for a rebound in Chinese economic activity. However, the path to re‑opening is unlikely to be smooth. There is a risk of restrictions being temporarily reintroduced if covid cases spike during reopening efforts.”
• “Nevertheless, we expect China’s economic recovery will ultimately benefit AUD more than NZD. First, Australia’s greater exposure to China’s economy suggests AUD will outperform. Second, we expect China’s recovery will be driven by infrastructure investment which is likely to underpin demand for Australia’s mining exports compared to New Zealand’s (predominantly) food exports.”