SYDNEY: The Australian dollar gained ground on Tuesday, helped by high resource prices and the blistering pace of vaccinations at home, while New Zealand bond yields spiked ahead of a looming lift in local cash rates.
The Aussie firmed 0.2% to $0.7303, after recovering from a dip to $0.7266, but remains shy of resistance at $0.7316. It has been edging up after the resilience of support at $0.7220 forced speculators to cut back on crowded short positions.
The kiwi dollar stood at $0.7020, having met resistance around $0.7030 overnight, though support at $0.6982 has proved solid so far.
Underpinning the Aussie, data showed retail sales fell 1.7% in August, when analysts had expected coronavirus lockdowns to cause a 2.5% drop.
A rapid and sustained acceleration in vaccinations means retail will start to open again from next month.
"We would attribute AUD's outperformance to the revival of interest in the reflation/'living with Covid' re-opening trade," said Ray Attrill, NAB's head of FX strategy.
"The AUD has been the favoured whipping boy whenever doubts about the speed of global economic re-opening have risen to the surface in recent months." Wagers on reflation have pushed energy prices higher, particularly for oil and gas, and sharply lifted bond yields.
Attrill noted the gains in gas and coal prices were keeping Australia's terms of trade near record highs despite a steep fall in iron ore prices in recent months. Australia is a major exporter of all three resources.
The rise in energy costs was feeding speculation that inflation globally would stay higher for longer, and lead some major central banks to soon start normalising policy.
Markets have brought forward the likely timing of a first hike from the US Federal Reserve, sending two-year Treasury yields to 18-month highs at 0.31%.
The Reserve Bank of Australia (RBA) is still insisting it will hold rates at 0.1% out to 2024, which kept local two-year yields down at just 0.027%.
As a result, the spread between Australian and US yields widened out to -28 basis points, from -20 basis points a week ago. The 10-year bond has tended to track more closely to Treasuries, keeping its yield spread around -4 basis points.
New Zealand is in a different world as its central bank is widely expected to start a series of rate rises next week and two-year yields are already up at 1.04%.
Ten-year bonds are paying 1.98%, the highest since a brief spike in March last year.
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