SYDNEY/WELLINGTON: The Australian dollar scaled a 4-1/2-month peak on Wednesday after a higher-than-expected domestic inflation reading reduced the chances of further interest rate cuts from the central bank and caused a short squeeze.
The New Zealand dollar took a step back after investors booked profits following hefty gains but remained near May peaks.
The Aussie shot up half a cent to $0.9758, its highest since early June, to last trade at $0.9734. A sustained break above key chart resistance at $0.9750 would target $0.9800, the 61.8 percent retracement of the $0.8848-$1.0592 fall.
Traders cited option related selling around $0.9750 and ahead of $0.9800.
The Aussie made solid gains against the euro, yen and pound to be within a whisker of multi-month peaks.
It had already been buoyed overnight after a disappointing labour report in the United States cemented expectations that the Federal Reserve would keep its stimulus in place until early next year.
The latest Aussie spike came after data showed domestic underlying inflation modestly higher than forecasts, adding to the case the Reserve Bank of Australia could be done with its easing cycle.
David Scutt, a trader at Arab Bank Australia, sees scope for the Aussie to return to parity which was lost mid-April.
"If we get underwhelming US data following its government shutdown, the Fed's tapering off the cards, perhaps until the second half of 2014, and China strengthening, the Aussie would be one place to go to."
Bank bill and interbank futures fell as much as 20 ticks with investors now giving a mere 14 percent chance of a cut in December to a record low of 2.25 percent, rising to 50/50 by April.
Swap markets are actually pricing in 9 basis points of tightening on a one-year horizon.
Across the Tasman sea, the New Zealand dollar held at $0.8500 after it had stormed to a five-month peak of $0.8544 overnight.
The kiwi gained more than half a cent following the weak US labour report, but was struggling to push on.
"Interest from speculative and leveraged accounts to sell rallies above $0.8500 seems to (be) keeping the currency's gains in check for now," said Bank of New Zealand currency strategist Mike Jones.
He said a sustained break through resistance at $0.8530 would open the way for a retest of April's near two-year high of $0.8676. Technical support is seen initially around $0.8475, with solid support at $0.8430.
The kiwi gave ground to a firmer Aussie dollar after Australia's third quarter inflation data surprised on the upside with the Aussie jumping 0.6 percent to NZ$1.1477.
New Zealand government bonds were trading with a bid tone, sending yields as much as 5.5 basis points lower.
Following sharp moves in US Treasuries, Australian government bond futures edged higher with the three-year bond contract up 2 ticks at 96.910. The 10-year contract added 6 ticks to 95.995.
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