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SYDNEY: The Australian and New Zealand dollars were trying to keep their rally rolling on Friday as markets reined in expectations for future US and global rate hikes, giving local bond markets one of their best weeks in years.

The Aussie edged back up to $0.6466, having been as high as $0.6522 overnight before a dive in iron ore prices pulled it down.

That put it 1.1% higher for the week and well away from a recent 2-1/2 year low of $0.6170.

The kiwi stood proud at $0.5866, having touched a one-month top of $0.5873.

It was up a hefty 3.8% for the week as speculators bailed out of crowded short positions.

Australia, NZ dollars hover near multi-week highs on central bank pivot hopes

Bonds benefited mightily after the European Central Bank hiked rates as expected but sounded cautious on the outlook, stoking a big rally in Euribor futures.

Investors also again lengthened the odds on the Reserve Bank of Australia (RBA) hiking by an outsized 50 basis points at its November policy meeting next week, following October’s quarter-point move.

That reversed the hawkish shift that followed an alarmingly hot reading for third quarter consumer prices that showed core inflation surging to a 32-year peak of 6.5%.

A record rise in producer prices suggested inflation would accelerate further this quarter.

Futures and swaps now imply around an 80% chance of a quarter-point hike to 2.85% on Nov. 1, and 20% for a larger move.

A Reuters poll of 32 analysts found 28 expected a rise of 25 basis points, with the rest tipping 50 basis points. Most see rates topping out between 3.6% and 3.85%.

Of the major local banks, NAB, CBA and ANZ reckon the RBA will opt for a quarter-point move while Westpac shifted to 50 basis points after the inflation data.

“The optics of dropping the pace of tightening in October and then stepping it up the following month would not look good,” said Gareth Aird, head of Australian economics at CBA.

“And such a decision would send a very confusing message to households and businesses.”

“On balance we favour a 25bp rate hike, but think it’s probably a closer call than is implied by market pricing.”

Bond markets are clearly betting on a slowdown in the pace of tightening globally, with Australian three-year yields down a staggering 50 basis points this week in the biggest drop in a decade.

Yields on 10-year paper fell almost as much to 3.75%, putting them 15 basis points under Treasury yields.

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