October 21, 2013
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Equity Prices Drove AUD/USD and NZD/USD

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The internal FX valuation model of BNP Paribas indicated forex signals that the crosses AUD/USD and NZD/USD depreciated the past week to 0.9340 and 0.8250, respectively. This contrasts the opposing lifts in the currencies in its fair values and making both crosses vulnerable to depreciate. Despite that, these currencies trade within their z score corridors of plus or minus 1.5. The pressure is traced to the declining fair values of AUD/USD and NZD/USD in the “relative equity” component of the broker internal FX valuation model.

FX vs. Equities

US stock market have risen by nearly 2% while the Australian and New Zealand equity prices were flat. Ever since, global equity prices have been one of the drivers or “forex converters” of AUD/USD and NZD/USD. However, BNP Paribas FX model is already showing that the local Australian and New Zealand fundamentals are becoming more useful in analysing the said forex converters of the market.

EUR/NOK and GBP/USD

EUR is perceived to be overbought versus the NOK. EUR/NOK seemed to be flexed, which is trading more than twice its z-scores above fair value. It went down lower but trades 1.36 standard deviations above its fair value as the so called forex converters continue to send a downward bias.

Meanwhile, GBP/USD is now trading at par with the peers of BNP Paribas’ FX valuation model. The model has been indicating that GBP/USD was overvalued and prone to move lower in the past few weeks. Furthermore, the model paced higher to 1.5960 from 1.5840 while the forex converters here are, it declined sharply from 1.6085 to 1.5985. The forex converters further signal there is no longer an expansion of the UK-US interest rate differential in favour of the UK. Even though some of these improvements in rate differentials were offset by global stock markets, which substitutes for investors’ risk appetite.

In Relation to FX peers in BNP Paribas FX Model…….

  • AUDUSD and NZDUSD are overvalued
  • USDJPY and EURCHF remain undervalued
  • GBPUSD has moved back in line
  • EURSEK continues to trade in line
  • EURNOK remains overbought
  • EURUSD and EURGBP are trading broadly in minus 2.5 in-line with their short-term fundamentals.

Cheaper USD/TWD

USD/TWD is the most undervalued Asian currency pair trading nearly two z-scores below its peers in the FX model. Even then, the model for USDTWD is still failing to get through our ‘cointegration filter’, which indicates whether a model passes the statistical assumptions made. The forecasting power of any trading signal is much lower, when BNP Paribas’ FX model does not pass this test filter. USDTWD has been significantly undervalued, it has failed to pass the cointegration filter. USDTWD is, therefore, currently less likely to be a forex converter in this context.

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