AUD/NZD: The conundrum cross – ANZ

Research Team at ANZ, notes that the AUD/NZD is once again edging back towards historically low levels despite a number of traditional fundamentals continuing to suggest that it is cheap.

Key Quotes

“Other factors, like relative wages, migration, and foreign bond ownership, suggest that current levels are closer to fair and that the NZD has enjoyed a relative image upgrade. However, these factors are not likely to push much further in favour of the NZD.

As such, while on a medium-term horizon the current level of the cross presents value, to get tactically bullish we would need to see either a more definitive shift in the liquidity environment or broadening evidence that the worst of Australia’s wages stagnation has passed.

The analysis that we have undertaken (both old and new) continues to strongly suggest further downside in the cross is not fundamentally justified. However, by that same token, there are a number of factors which explain why the NZD is more in favour at the moment.

These factors look to be very well priced into the current level of the cross, and at the margin look to be at risk of eroding (the Australian mining sector is basing and global liquidity is peaking).

As such, we think we are at levels that present value, and continue to recommend that corporates or investors with a medium-term horizon begin to accumulate AUD. However, on a tactical basis we are not ready to become out-right bullish on a spot basis. Sentiment looks to be one of the primary drivers of the cross and while that is the case, overshoots are still possible.”