CBA: Trading A Little Below Fair Value Range

CBA note that their previous AUD/NZD fair value equation “included the two year Australia‑NZ swap yield differential and the ratio of Australian to NZ commodity prices. We have updated the model by including the Chinese manufacturing PMI. We find the Chinese manufacturing PMI to be highly statistically significant in our equation. As expected the Chinese manufacturing PMI has a positive coefficient implying an increase in the PMI leads to an appreciation in AUD/NZD all else equal. This makes sense economically as Australia is highly exposed to China’s manufacturing industry via mining exports. By contrast, New Zealand is mainly exposed to China’s household sector via dairy exports. Our new equation has a better fit than our previous equation and explains around 77% of the variation in the AUD/NZD. According to our equation, fair value is in the range of 1.12‑1.21, centred on 1.16. AUD/NZD is currently trading a little below the bottom of our fair value range. We forecast AUD/NZD to appreciate through the rest of 2022 and in to 2023, as high energy prices support AUD.”