Westpac: Fair Value Supports Spot Rally

Westpac note that “over the past month AUD/NZD has printed highs around NZ$1.1170, its strongest levels since 2018, extending the powerful upswing from below NZ$1.04 in December 2021.

• “However, in late June, the pair has faltered, trading mostly just below NZ$1.10, barely above the levels seen prior to the RBA’s 3 May rate hike which opened up higher trading ranges.”
• “Sharp falls in base metals and iron ore prices in recent weeks have undermined the Aussie, implying a lack of confidence in China’s ability to revive growth in H2 2022, despite its pledges to boost infrastructure.”
• “Weakness in AUD/NZD in H2 2021 was largely due to the RBNZ’s early start to unwinding pandemic policy settings. It remains on the front foot, having already raised its cash rate to 2.0% and markets pricing a further 50bp hike on 13 July. However, markets price aggressive RBA tightening despite Governor Lowe’s skepticism, so the Aussie’s 2 year swap yield discount to the Kiwi has shrunk sharply since Q1.”
• “Relative commodity prices remain in the Aussie’s favour, with energy (LNG and thermal coal) extremely high, helping Australia run C/A surpluses in contrast to NZ’s deficits. Fair value looks to be around NZ$1.12-1.13.”
• “Near term, poor global risk sentiment including regarding China could see AUD/NZD back to the NZ$1.08 handle for a while. But we expect the pair to rally beyond NZ$1.12 later in Q3.”