Australian dollar resumes climb on yen as bond yields spike

SYDNEY: The Australian dollar was holding its ground on Thursday as a sharp rise in bond yields delivered gains on the low-yielding yen and offset strength in its US counterpart.

Upbeat local and US data saw yields on Australian 10-year bonds spike to 3.48%, from 3.23% at the start of the week, widening the spread over Treasuries to 57 basis points.

With Japan holding its yields near zero, the Aussie pushed on to 93.23 yen bringing gains for the past week to 2.4%. It also helped steady the Aussie at $0.7171, after briefly touching a one-month high of $0.7231 overnight. Major resistance lies at the 200-day moving average of $0.7258, with support at $0.7150.

The kiwi was looking shakier at $0.6473, having recoiled from a peak of $0.6564 hit earlier in the week. Support now lies around $0.6450.

Australia, NZ dollars lose ground

Bonds were also pressured by a surprisingly hawkish outlook from the Bank of Canada, which suggested it might hike by 75 basis points at some stage.

The move encouraged speculation the Reserve Bank of Australia (RBA) could hike the 0.35% cash rate by 40 basis points next week, rather than the 25 basis points widely expected.

Futures still lean toward rises of 25 basis points (bps) in both June and July, and by 50 bps in August following inflation data for the second quarter that are likely to be red hot.

Felicity Emmett, a senior economist at ANZ, reckons the RBA will hike by 40 basis points next week given the strength of GDP wage and inflation measures.

“This suggests to us that policy needs to lean more strongly against the broadening of inflation pressures,” said Emmett. “As such we think the strength of the price and wage measures in the GDP data should be enough to convince RBA Governor (Philip) Lowe that ‘there is a very strong argument’ to deviate from a regular 25bp move and get the cash rate a little higher a little bit faster.”

Local data were positive for the Aussie at the margin as Australia’s trade surplus widened by more than expected to A$10.5 billion in April thanks in part to rising exports of liquefied natural gas.

A dip in imports also suggested trade would be less of a drag on the economy than what it was in the first quarter.