Westpac: The Aussie dollar isn't going to fall anytime soon

The Aussie dollar has rallied since the RBA decided to hold rates steady at 2.25% earlier this week.

What’s notable about the rally is that while the Aussie dollar’s strength was initially consistent with the weaker US dollar — after last week’s big miss on non-farm payrolls — even after the crash of the Euro and Sterling this week, it has held steady and is currently sitting around 0.7695.

What’s driving the Aussie’s strength according to Westpac’s senior currency strategist Sean Callow is the changed expectations of the timing and magnitude of the Fed’s tightening cycle and renewed Japanese buying of Aussie dollars. This means the interest rate differential in favour of the Aussie is continuing to attract buyers.

There is also a lot priced into the fall in commodities and their relationship with the Aussie dollar. Worth noting is that while Australian commodity exports are dominated by iron ore and coal, but they are not the only resources sent overseas.

Callow told Business Insider that it was “notable that the RBA this week dropped the claim that AUD is overvalued.” He said the currency strategy team’s short term fair-value model says the Aussie should be in the 76 cent region while the longer term economists model has the Aussie sitting around 75 cents.

Tying it all up, Callow believes that the Aussie has found a bottom around 75 cents for the moment and will drift up toward the top of the 75-78 cent range over a “multi-week” time frame. However, he adds that as we head into the third quarter of this year that Westpac expects US data to improve, “commodity prices should stay heavy and markets are likely to continue to lean towards further RBA easing beyond the cut we expect in May.”

That means the Aussie dollar should “grind down to the 0.73-0.75 region”.

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