SYDNEY: The Australian dollar stood near six-month highs on Friday as yield spreads swung in its favour, delivering a break of major chart resistance and hefty gains on the Japanese yen.
The Aussie was up at $0.6731, having gained 0.9 per cent for the week so far to reach $0.6733. The next major bull target is a peak from December last year at $0.6871.
The kiwi dollar was lagging at $0.6115, to be up 0.4 per cent for the week. It had, however, bounced from a six-week trough of $0.6048, but faced resistance around $0.6140.
The Aussie also climbed 1.1 per cent for the week on the yen to reach its highest since mid-1991 at 108.52.
"We expect AUD/USD to keep edging higher to above $0.7000 into next year, though the rise may not be linear," said Kristina Clifton, a senior currency strategist at CBA.
"AUD tends to lift when the U.S. cuts interest rates modestly," she added. "Interest rate cutting cycles by the U.S. and other major central banks can improve the global economic outlook, also supporting AUD/USD."
The gains have been underpinned by wagers that the next move in Australian rates might be up given inflation is proving stubborn.
Consumer price inflation surprised everyone by jumping to an annual 4 per cent in May, leading the Reserve Bank of Australia (RBA) to warn that a further tightening might be needed.
Markets are pricing a 33 per cent chance the RBA could hike at its August policy meeting, should the inflation report for the second quarter due in late July also surprise on the high side.
In contrast, a run of soft U.S. data has seen markets revise up the chance of a September rate cut to 73 per cent.
The divergence in the outlook has been reflected in the bond market. Yields on 10-year paper were up 9 basis points for the week at 4.420 per cent, with the spread to Treasuries swinging hugely to +7 basis points from -30 basis points back in April.
The Reserve Bank of New Zealand (RBNZ) meets next week and is considered certain to hold rates at 5.5 per cent, and likely retain a tightening bias.
"We don't think the markets will get a dovish tilt that supports recent pricing of around a 50% chance of an easing in the October Review and around 35bps priced in by end 2024," said Kelly Eckhold, chief economist at Westpac.
"If anything like that is coming, we will see it at the August Statement where full forecasts can be presented and key data on the Q2 CPI and labour market will be available."