Aussie dollar higher with hike bets; kiwi gains

SINGAPORE: The Australian dollar hit a six-week high on Friday and along with its New Zealand counterpart was headed for a third weekly rise in a row, helped by hopes for China’s recovery from lockdowns and on expectation of domestic interest rate rises.

The Aussie broke resistance around 72 cents overnight and reached $0.7282 on Friday, before pulling back a little. It is up 1.3% for the week.

The kiwi touched $0.6576, its highest level since April 27. Trade was lightened by holidays in China and Hong Kong and London trade will be thinned by a holiday in Britain.

Overnight mixed US economic data gave succour to hopes that the Federal Reserve might pause or temper the pace of rate hikes later this year, while bets are running the other way for the Reserve Bank of Australia (RBA).

The RBA raised rates by 25 basis points (bps) last month, and traders are sure they will do so again next week, pricing about an 80% chance of a larger 40 bp hike.

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“Australia is facing a formidable inflation challenge which needs a stronger early response than the minimum 25 basis point gesture,” said Westpac’s chief economist Bill Evans.

“We think it is much more likely that the 40 basis point option will be taken.” About a third of economists polled by Reuters expect a 40 bp hike.

A widening trade surplus, thanks to a return of tourists and rising exports of liquefied natural gas, as well as the end of a two-month lockdown in Shanghai have also given the Aussie some support. The gap between Australian and US yields is also growing and at the 10-year tenor touched its widest in four years in favour of Australia on Friday.

Australian government bond futures were steady on Friday but have snapped three weeks of gains this week.

The three-year bond contract was down 24.5 ticks this week to 96.915.

The 10-year contract fell two ticks on Friday to 96.465, a drop of 26.5 ticks on the week. The yield on 10-year New Zealand government debt rose 14 bps to 3.650% this week.