PARTY POSTPONED: Westpac doesn’t see Aussie-Kiwi hitting parity

Photo by Win McNamee/Getty Images

Others think it will, but Westpac currency strategist, Sean Callow, doesn’t think the New Zealand dollar will reach parity with its Australian namesake.

Yes, box up the balloons and streamers and put the champagne on ice. The parity party looks set to be postponed for yet another year.

“New Zealand’s strong domestic data, a surge in dairy prices and the RBNZ’s clear message that there would be no rate cut in September weighed on AUD/NZD in recent weeks, despite decent fundamentals for AUD,” said Callow in a research note on Friday.

“But while reaching lows since April 2015, AUD/NZD avoided a break of 1.02 and probably has scope to rebound to 1.06, perhaps as far as 1.0750 multi-week.

“The dairy price rally lost momentum in the most recent auction, while the RBNZ firmly reiterated that another rate cut ‘will’ be required. Meanwhile, pricing for another RBA rate cut is fading and Australia’s commodity price basket continues the impressive rally that began in June,” he added.

Rather than seeing parity, Callow suggests the AUD/NZD is undervalued by about 7 cents based on modeling that captures yield differentials and commodity prices, noting that even with the rally in recent days the pair remains undervalued.

“AUD/NZD has been trading below our weekly fair value estimates for some time but the recent undervaluation was extreme,” he says.

“Even after the past week’s bounce, AUD/NZD remains a long way short of 1.11+ fair value.

“We don’t expect such a level to be reached this year, but the directional risks are clear heading into Q4.”

Here’s Westpac’s AUD/NZD fair value model, overlaid against movements in the spot price. Mind the gap.