NZD/AUD: Potential to fall slightly further to 0.90 by year end - Westpac

Imre Speizer,  Research Analyst at Westpac suggests that after falling 5c over the past two months, NZD/ AUD has potential to fall slightly further to 0.90 by year end and a key factor will be whether AU’s commodities continue to outperform NZ’s, while the fair value is around 0.89.

Key Quotes

“The NZ economy remains in good health, although recently there has been a slippage in key activity indicators such as GDP, inflation, and employment. This slippage has been captured by our model of economic momentum, the NZ data pulse falling sharply over the past two weeks.”

“Australia’s data pulse sits slightly below average, reflecting an economy that had a patchy start to the year but is growing at a moderate pace. After a weak summer, job creation picked up sharply in autumn, with annual jobs growth rising to 2%. The residential construction pipeline remains very large and Australia should continue to print trade surpluses. Sentiment surveys are mixed: businesses are very confident but consumer sentiment is below average.”

“The implications of this are slightly negative for NZD/AUD if the NZ data pulse extends its decline and remains below Australia’s.”

“If the NZ/AU commodity price ratio continues to fall, so too should NZD/AUD.”

“Combining our thoughts on commodities and interest rates (and other relevant factors) into a market-based fair value model for NZD/AUD, we get a fair value of 0.89. According to this model, NZD/AUD is 3c overvalued at present. That’s not large compared to the 12c overvaluation which existed in December, but it does suggest the cross could fall a little further.”

“Futures speculators are long both NZD/USD and AUD/USD, according the CFTC. In NZD/USD’s case, the longs are at a historically extreme level, warning of an eventual reversal. AUD/USD longs are also large, but not quite as stretched. If futures positioning is any guide to spot positioning, then both currencies are at risk of falling if positions are rebalanced towards neutral. The implication for the cross is roughly neutral, perhaps slightly negative at a pinch.”

“Technicals

The daily chart for NZD/USD shows a bearish “head-and-shoulders” pattern which is close to triggering a breakdown. Should the “neckline” at 0.9200 give way, the pattern would signal a fall to at least 0.9075. Note that the head-and-shoulders patterns is one of the more reliable classical charting patterns, but still has a significant failure rate.

Looking at longer term charts of NZD/AUD, the immediate impression is of a fairly orderly, cyclical pattern. It has ranged in a slightly ascending channel about 25c wide since the NZD and AUD were both floated. There have been four major cycle peaks, 7 to 10 years apart. One takeaway is that the cross is near the range high, but the chart says nothing about how long it can remain so.

The post-float price history of the cross has a distribution which is close to normally shaped (i.e. bell curvish). If anything, there is a slight skew to the shape, indicating it spends more time in the upper part of the historical range than the lower part. That means that even though it is currently near the longterm range high, it could spend some time here - pretty much what our models and technical charts are telling us.”