SYDNEY: The Australian dollar was seeking to extend a meteoric run on the Japanese yen on Thursday as a more hawkish outlook for domestic interest rates saw yield spreads widen further, to its advantage.
The Aussie was taking a breather at 96.40 yen, having climbed to a seven-year top of 96.87 overnight.
That brought gains for the past two weeks to 6.2% and cleared the way for a test of twin peaks from mid-2015 at 96.99 and 97.28.
With all the action in the yen, the Aussie was left to drift on the US dollar at $0.7175, having failed to clear the 200-day moving average at $0.7255. Support comes in around $0.7140.
The New Zealand dollar was pinned at $0.6439, after meeting resistance around $0.6500 overnight.
Australia dollar speeds to 7-year peak on yen as RBA changes gear
Support lies at $0.6423 and a break there would be quite bearish.
The rally on the yen comes as the Reserve Bank of Australia (RBA) takes an aggressive turn on monetary tightening while the Bank of Japan sticks doggedly to its super-easy policies.
That divergence has seen the Australian 10-year bond yield rise to 3.603%, matching its highest since September 2014, while Japanese yields are held near zero.
As a result, the Australian premium over Japanese bonds has yawned out to its widest since early 2014 at 334 basis points. In 2014 the Aussie peaked above 102.00 yen.
The Aussie has an added trade advantage in rising oil prices, as Australia is a net exporter of energy while Japan is a major importer, worsening its current account position.
“Japan has a nearly opposite backdrop: its central bank is sitting out the global tightening cycle amid weak core inflation pressures, and elevated commodity prices are weighing on its terms of trade,” said Jonathan Petersen, a markets economist at Capital Economics.
“The strong economic recovery in Australia continues to push up underlying price pressures, so we think policymakers will follow through with two additional 50bp rate hikes in July and August.”
The RBA surprised markets by lifting interest rates half a percentage point this week to 0.85%, and futures have swung to imply rates could reach 2% by September and 3% by year end.
The market also has interest rates up as far as 3.75% by the middle of 2023, well above most economists’ forecasts.
After that, the market shifts to price in some risk of rate cuts, given the economy will likely have slowed sharply by then.
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