SYDNEY: The Australian and New Zealand dollars held on to hefty gains on Friday after the greenback came under pressure from a dovish shift in US Federal Reserve expectations, putting them on track to end the week higher.
The Aussie rose to $0.9268, from $0.9244 in early trade. It rose nearly one percent on Thursday and away from three-year lows below 90 cents touched mid-month.
The rally followed a media report that the Fed may debate changing its forward guidance to help ram home its message that it will keep interest rates low for a long time to come.
The Aussie is up 1.3 percent for July and if that is sustained, it would end three months of losses.
Major resistance for the Aussie was found all the way from $0.9300 to $0.9350 with traders citing strong support near $0.9130, ahead of a 3-year trough of $0.8998.
The New Zealand dollar was up at $0.8084, having rallied more than one percent overnight to briefly hit a six-week high. It was up 1.8 percent for the week so far and an impressive 4 percent for the month, which would be the largest such increase in a year.
Investors warmed to the kiwi after the Reserve Bank of New Zealand surprised some on Thursday with a slightly hawkish statement, even as it pledged to keep the cash rate at a record low 2.5 percent through the end of the year.
That was enough to send the Aussie reeling versus its kiwi cousin, with traders citing selling from New Zealand importers. It last stood at NZ$1.1453, after touching a near five-year trough of NZ$1.1388.
Markets are pricing in a 70 percent chance that the Reserve Bank of Australia (RBA) will cut its cash rate to a record low of 2.50 percent next month. In contrast, the RBNZ is widely expected to raise its 2.5 percent rate early in 2014.
"Everyone is clearly on the bandwagon that the RBA is going to keep cutting rates, while we're going to hike," said Tim Kelleher, head of institutional FX sales at New Zealand's ASB Bank.
But the sheer popularity of the trade carried dangers.
"The risk is that it's a very crowded trade and everyone has the same position, long on the kiwi and short the Aussie. So if the RBA doesn't (cut rates) we could see a rapid move back in the Aussie."
He expected the kiwi's gains to peak at 87.50-88.00 Australian cents, or around NZ$1.1420-NZ$1.1350, a level at which he would sell.
Against the US dollar, investors were focused on whether the kiwi would end the week above the key level of $0.8100, the 100-week moving average. A break would open the door to a test of $0.8137 and $0.8213.
Technical support was seen at $0.8062, the 38.2 percent retracement of the kiwi's April-June slide.
New Zealand government bonds eased, pushing yields 2.5 basis points higher across the curve.
Australian government bond futures were firm with the three-year bond contract 0.02 points higher at 97.310, while the 10-year contract added 0.01 points to 96.225.
Rising expectations of an imminent rate cut in Australia resulted in a sharp steepening of the curve. The spread between three- and 10-year cash bonds has widened to 112 basis points, matching levels not seen since 2009.
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