SYDNEY/WELLINGTON: The Australian dollar held near three-week highs on Thursday as investors pared back short positions ahead of key event risks, while growing perception the Reserve Bank of Australia may not ease again this year also underpinned appetite.
The Aussie rose to $0.9161 from $0.9128 in local trade the previous day. It matched the peak of $0.9188 hit on Wednesday, which was the highest since Aug. 19.
The kiwi dollar was dragged higher to $0.7894, from an overnight low of $0.7855, showing a gain of two cents since Monday.
The Aussie suffered a brief and modest dip after data showed Australia's trade deficit widened to A$765 million in July, compared with forecasts of a balanced position.
"The headlines were far worst than what it really is. The mood for the Aussie is pretty bullish on the back of a neutral-sounding policy statement from the RBA," said David Scutt, a trader at Arab Bank Australia.
Some investors were wrong-footed after the RBA omitted on Tuesday a clear easing bias at its monthly policy meeting where it left rates steady.
The Aussie has gained 3 percent since Monday, and a weekly gain above 3.1 percent would be its strongest performance in two years.
"The Aussie's oversold, and there's a large collection of stale short positions, so I wouldn't be surprised if those were squeezed out," said Tim Kelleher, head of institutional FX sales at ASB. He forecasts the Aussie to climb towards $0.9400 in the next month.
Interbank futures show a less than 50-50 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 a cooling resources boom.
Paradoxically, a stronger Aussie dollar would increase the chances of an interest rate cut.
For now, Arab Bank's Scutt said the currency was on its way to test $0.9320, the July peak. The Aussie was also at one-month highs against the euro and yen.
As a result, the short end of the Australian bond yield curve extended gains with two-year cash bond yields at a two-month peak of 2.80 percent, a rise of 27 basis points since Monday's low.
Australian government bond futures fell with the three-year bond contract down 3 ticks to 97.030. The 10-year contract retreated 3 ticks to 96.945, the lowest since late June.
The New Zealand dollar lost further ground against the Aussie which rose to NZ$1.1602. The Aussie touched a seven-week high around NZ$1.1660 on Wednesday.
Given the bullish view of the Aussie in the near term, market participants expected a rise to around NZ$1.1800, which Kelleher at ASB said was a good level to buy back the kiwi.
Against the US dollar, technical support for the kiwi was seen at $0.7890, the 38.2 percent retracement of its slide in late August. Traders cited offers around $0.7925, and $0.7950.
New Zealand government bonds slipped, nudging yields 2 basis points higher across the curve.
Major hurdles ahead include the policy review by the European Central Bank later on Thursday and the US jobs report on Friday.
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