AUD/NZD fair value has generally trended higher since the pandemic hit in Q1 2020, as AUD’s fundamentals gained more on the extraordinary policy support delivered to revive the global economy. Our fair value model is mostly driven by yield spreads and commodity prices but also includes risk sentiment via volatility measure VIX and an index of China uncertainty (judged to hit AUD more).
Fair value took a hit in late 2021 (down to about 1.04) as yield spreads swung back sharply towards the Kiwi. This factor has been far less unfavourable for the Aussie in 2022.
Commodity prices have moved aggressively in AUD’s favour since the onset of the pandemic and extending in 2022. Westpac forecasts Australia to record a current account surplus of 1.4%/GDP over 2022, contrasting with NZ’s whopping -6.6% deficit, the widest since the GFC. Admittedly, some of this gap reflects NZ’s stronger domestic demand.
The undervaluation of the cross has narrowed slightly in recent weeks but remains substantial. - Westpac Strategy
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