Australian Dollar | Latest Australian Dollar Exchange Rate News
Downside in Austalian dollar / New Zealand dollar exchange rate to be limited say BarCap
- Details
- Category: Australian Dollar
- Published on Monday, 20 February 2012 12:29
- Written by Rob Samson
A morning foreign exchange rate note from Barclays Capital has noted that the investment banks fair value model suggests the downside risk to the AUD/NZD is likely to be limited and the bank therefore maintain their medium-term forecast of 1.26.
Relative Australia and New Zealand data and likely interest rate trajectories point to further downside in Australian dollar / New Zealand Dollar from current levels.
New Zealand data have, on average, beaten expectations more often than Australian data in recent months, pointing to the risk of a fall in AUD/NZD to around 1.25 by end-March.
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"In addition, we expect AUD-NZD interest rate differentials, which have widened 20bp since 18 January 2012, to narrow this year. The market is currently pricing the spread between Australian and New Zealand policy rates to narrow 65bp in the next 12 months but we think it may narrow by a larger amount as the RBNZ unwinds the post-earthquake emergency cut," say BarCap.
The note goes on to say:
"However, we think a sharp fall in AUD/NZD below 1.25 is unlikely. Our augmented fair value AUD/NZD model suggests that AUD/NZD spot is currently only 0.4% above fair value of around 1.276.
"Our model, which points the mean reversion of AUD/NZD towards fair value, incorporates three explanatory variables: purchasing power parity (PPP), the Australia-New Zealand 2-year interest rate swap differential and commodity price differentials (based on Commonwealth Bank of Australia's weekly index). The model is estimated using data from 1997 to 2008 (in-sample).
"Despite several large data and event surprises in recent weeks, including the February RBA meeting, Australia January employment and New Zealand retail sales (Figure 3), implied AUD/NZD volatility has been broadly stable since January (Figure 4). While event risk, including key decisions on Greece today, remains acute we expect volatility to remain reasonably well anchored. We are therefore closing our recommendation, initiated on 18 January, of being long AUD/NZD volatility through a 3m 25-delta AUD/NZD strangle, at a loss of 50bp."
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