FXStreet (Delhi) – Sean Callow, Research Analyst at Westpac, suggests buying AUD/NZD with a 1.05 handle as the fair value estimates continue to suggest that the kiwi is too strong given yield differentials and that there is scope for 1.10. Key Quotes “Our short term fair value estimate of AUD/NZD was around 1.13 in mid-December, backed by further increases in Australian yields after the very strong Nov employment data. Yield spreads have underpinned the rise in fair value from a 1.11 handle in October, with markets sharply scaling back expectations for further RBA easing. Markets price only a 10-15% chance of the RBA returning from its summer hiatus with a rate cut in February.” “To be sure, NZ yields also rose after the RBNZ’s December rate cut was seen by many as the end of the easing cycle, with the 2.5% OCR fully unwinding the 2014 tightening. But this month the 2 year AU-NZ swap spread narrowed to around -50bp, the smallest yield pickup for NZD since mid-2013. As such, yield differentials have not backed the renewed decline in AUD/NZD to 6 week lows.” “Commodity prices have tilted more towards the kiwi lately, with dairy outperforming iron ore and coal. But even accounting for this, our fair value estimate is a long way above spot. Any fair value estimate is prone to periods of over- and under-shooting. But patience should be rewarded during Q1 2016 for those looking to buy dips.” “Look to buy AUD/NZD with a 1.05 handle, with scope for 1.10+ during Q1.” For more information, read our latest forex news.