Westpac says the Aussie dollar is looking a little expensive at 80 cents

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The Australian dollar is back at 80 cents for the first time in four months, surging by more than 6% against the US dollar since early December last year.

According to Sean Callow, senior currency strategist at Westpac, the Aussie is now looking a little bit expensive based off his fair-value model.

Here’s what the model is saying about the Aussie’s current level:

Source: Westpac

“As the chart shows, short term fair value looks to be a little over 77 cents, so the test of 80 cents seems rather overdone,” Callow says.

Callow says much of the move can be explained by US dollar weakness with stronger commodity prices partially offset by a narrowing in Australian and US short-dated bond yields.

“US dollar weakness is a key reason for AUD/USD reaching 80 cents for the first time since September 2017,” he says.

“There has been considerable support from commodity prices with Westpac’s daily index of Australia’s commodity export basket up 4-5% since early December when AUD/USD was testing 75 cents.

“Some offset in terms of AUD fair value though comes from AU-US yield spreads moving against the Aussie.”

The recent disconnect between the AUD/USD and Australian and US two-year bond yields can be seen in the chart below from Westpac:

Source: Westpac

Looking ahead, Callow says movements in the Aussie will likely be determined by the actions of the Bank of Japan (BoJ) and European Central Bank (ECB) who will both hold monetary policy meetings next week.

“If the BoJ and ECB push back hard on tapering/rate hike chatter respectively then AUD/USD should find the [80 cent level] hard to sustain,” he says.

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