SYDNEY/WELLINGTON: The Australian dollar rallied on Wednesday as data showed the economy performed better last quarter, wrong footing some investors who had bet on a weaker outcome and leading the market to scale back expectations for another cut in interest rates.
The Aussie powered up to a two-week high of $0.9105, from $0.9060 in early trade and a three-year trough of $0.8848 touched last month. It also climbed sharply to 90.52 yen , while the euro slid to A$1.4466.
The kiwi dollar was dragged higher to $0.7810, from an overnight low of $0.7775, but extended losses against its Aussie cousin.
The Australian dollar rose to NZ$1.1646, its strongest since mid-July and well off a five-year low of NZ$1.1196 touched last month.
The Aussie was squeezed higher after data showed Australia's economy grew by 0.6 percent in the second quarter and 2.6 percent for the year. While growth was still below trend, some speculators had wagered on a much weaker outcome and were caught short.
The Aussie has now gained two percent since Monday and immediate resistance was found at $0.9140, the 61.8 percent retracement of the $0.8848-$0.9325 decline. Traders cited decent selling from hedge funds around $0.9080-90.
Two-year cash bond yields climbed to a two-month peak of 2.77 percent, a rise of 20 basis points since Monday's low.
"The market reaction was justified," said Alvin Pontoh, a strategist at TD Securities in Singapore.
"Some had expected a softer outcome but after this report another easing is unlikely," he said, seeing no more rate cuts for this cycle.
Investors had already pared back expectations of further easing after the Reserve Bank of Australia (RBA) held its cash rate at a record low of 2.5 percent on Tuesday.
Interbank futures show a 50 percent chance of a rate cut by Christmas, down from more than 100 percent a couple of weeks ago.
Swap markets have priced out any easing at all, though much depends on how the Australian dollar fares and whether non-mining sectors of the economy gain enough speed to replace an ending resources boom.
The Australian dollar has dropped 15 percent since April, bringing a much-needed boost to export earnings while lessening competitive pressure on manufacturing.
Many analysts suspect that should the dollar hold above 90 US cents, the RBA will choose to offset it by cutting again.
Australian government bond futures fell with the three-year bond contract down 9 ticks to a two-month low of 97.040. The 10-year contract retreated 4.5 ticks to 96.960, with the yield curve flattening.
New Zealand government bonds fell, sending yields around 6.5 basis points higher along the curve.
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