NZD/AUD should eventually correct its extreme overvaluation - Westpac

Imre Speizer, Research Analyst at Westpac, suggests that the NZD/AUD may continue to defy gravity during the next few weeks but should eventually correct its extreme overvaluation.

Key Quotes

“The NZD/AUD cross has failed to break below the 0.9300 barrier during the past six months, despite repeated attempts. As a result, it is now extremely overvalued according to both our short and long term valuation models.

Both economies are growing at trend or above, share similar monetary policy outlooks (beyond the fully-priced RBNZ cut next week), and have experienced sharp commodity price recoveries. In searching for key differences of relevance to the cross, doubts about the sustainability of Australia’s commodity rallies may be part of the explanation for the NZD/AUD’s extreme overvaluation. Another could be the gradual rise in risk aversion since August, the AUD currently more sensitive to global risks than the NZD.

Assuming no major negative global shocks, we expect an eventual break below 0.9300 during the next few months for technical and valuation reasons.”