Australian dollar makes broad gains as yield spreads fatten

SYDNEY: The Australian dollar extended its climb on Thursday as widening yield spreads against a range of currencies attracted funds, while breaks of chart barriers drew momentum buyers.

The Aussie rose 0.3% to a fresh three-year high of $0.7146, having already added 0.7% overnight.

The next barrier is $0.7158, followed by $0.72825.

It also hit a 12-month peak on the euro and a 10-month top on the Swiss franc, while reaching heights on the kiwi dollar last seen in mid-2013.

The Aussie has been underpinned by a steady widening in yield spreads over its peers, with three-year Australian debt now paying 75 basis points more than Treasuries compared to 60 basis points less this time last year.

The last time spreads were this wide was 2016 when the Aussie was trading around $0.7500.

Three-year yields were also 223 basis points above bunds, the biggest gap since late 2022 and a rise of almost 90 basis points in just four months.

The widening has been driven by the Reserve Bank of Australia’s turn from cutting rates last year to hiking last week as inflation surprised on the upside.

Appearing before parliament on Thursday, RBA Governor Michele Bullock emphasised the board would tighten further if inflation proved stubborn, suggesting much was riding on consumer price data for the first quarter due in late April.

Markets now imply about an 80% chance the RBA will hike the 3.85% cash rate at its May board meeting, and a 60% probability rates could end the year at 4.35%.

“Australia now has the highest policy rate of the economies we track,” noted analysts at CBA in a note.

“We expect the RBA to increase interest rates again in May.

“Markets are now pricing around 54bps of US cuts by year-end, and we expect the ECB to leave interest rates unchanged through 2026.”

The Reserve Bank of New Zealand meets next week and is considered certain to leave rates at 2.25%, having cut by a total 225 basis points over the past year or so.

Investors are focused on whether the central bank still expects a first hike in mid-2027.

Markets imply a 76% chance of a September increase, with a move to 2.5% fully priced for October.

The kiwi dollar firmed 0.2% to $0.6058, after edging up 0.1% overnight, but was still short of its recent peak at $0.60925.