“This has seen us scale back the extent of NZD/AUD appreciation we expect this year. Our year-end forecast has been nudged down from 0.8400 to 0.8200.” he adds. The direction of this revision fits nicely with our view the long-run equilibrium (LRE) of the NZD/AUD has shifted down in the past few years.
According to our new terms of trade adjusted PPP model, the LRE of the NZD/AUD has fallen to around 0.7800, reflecting Australia’s relatively bigger terms of trade boom. “A lower NZD/AUD LRE suggests the cross may have moved from the 0.7800-0.9500 trading range of the 2000’s, to something more like 0.7200-0.8500.” Jones states.