Some great work from Westpac Head of Market Strategy Robert Rennie

He says:

  • The A$ has risen by 4.3¢ (5.7%) over last 8 weeks
  • over the same period the Westpac Markets fair value model has risen by just 1.3 ¢ (1.8%)

and asks:

  • Why is the A$ so strong?

Rennie then explains the factors pushing the currency higher:

Commodity prices are strong

  • Westpac Australian export weighted commodity index is at 1yr highs

Risk sentiment in global financial markets has also been positive

A factor weighing on the currency though:

  • AU-US 2yr swap spread is at fresh lows back to December 2000

Concludes:

  • Our fair value model framework thus suggests that as much as 70% of the recent rise in the A$ could have been driven by the recent slide in the US$. If history is a guide, that leaves the A$ looking 'expensive' at least on the basis of our fair value framework.