A little over a week ago AUDNZD’s rally stalled near 1.0875 and it has been retracing back towards the key 1.0750 level, which sees the convergence of the 55 & 100-day sma’s. Accordingly, this still leaves intact AUDNZD’s series of lower highs and higher lows since the beginning of 2014 – The definition of a consolidation pattern (exhibit 1). That being said, over the past few days our proprietary model and AUDNZD have diverged (exhibit 2), as price has been moving lower while the model pushes higher.
Backdrop:
These models were built in an effort determine where many of the FX pairs should be trading, thus we continuously monitor currencies which we have deemed to have a stronger degree of explanatory power using our regression analysis (R2), with variables which we see as statistically significant.
AUDNZD’s proprietary model takes into account:
- AUDNZD’s 1-year at-the-money option volatility
- Equity spread between Australia’s ASX 200 & New Zealand’s NZX 50
- 5-year interest rate differential between Australia & New Zealand
This produces an R2 of 0.7205 since the beginning of May 2013 and implies a “fair value” of 1.1080. Based on current levels this suggests AUDNZD is undervalued by approximately 1.3 standard deviations. As a result, while this in itself is not necessarily indicative of a breakout, it is something AUDNZD traders may want to take into consideration over the ensuing days & weeks.
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