CBA Outline Their Fair Value View

CBA note that they have updated their “fair value equation for NZD/USD. We replaced the risk appetite proxy from the VIX with Bank of America’s broader market risk index (implied volatility on global equities, rates, currencies and commodities). We also included New Zealand’s current account balance. The updated equation explains over 80% of variation in NZD/USD compared to less than 60% in the prior equation. We estimate fair value is $0.62 (in a range of $0.60 to $0.64). The large fall in NZD reflects lower risk appetite, New Zealand’s fading interest rate advantage over the U.S., New Zealand’s widening current account deficit and lower commodity prices. We see further downside to NZD/USD from here because we also expect U.S. rates to climb and our ASB colleagues predict significant weakness in milk prices.”