AUD/NZD: undervalued on commodity prices and relative interest rates - Westpac

In respect of AUD/NZD, analysts at Westpac explained that the ratio of Australia’s commodity prices to a similar measure weighted by New Zealand’s key commodity exports has rallied strongly over the past 12 months, though November was the peak. 

Key Quotes:

"The surge in the prices of Australia’s top 2 exports - iron ore and coal - was a key surprise for AUD in 2016. In the case of coal, Chinese government steps to close unprofitable mines and reduce pollution played a larger role than expected in supporting volumes and prices of imported coal. 

There is also considerable attention on infrastructure spending plans, including a 50% boost for Xinjiang.

In Feb 2017, iron ore prices hit highs since 2013, though doubts remain over how sustainable the rally will be. Newcastle coking coal prices have halved since Nov 2016, while remaining up >50% y/y. 

For NZ, whole milk powder prices fell sharply from Dec to early March, but are still about 40% higher y/y. 

Overall, commodity prices support the message from relative interest rates that AUD/NZD is undervalued."