Australia, NZ dollars firm, A$ at fresh tops on yen and euro

SYDNEY: The Australian and New Zealand dollars held firm on Thursday amid a general lift in global risk sentiment, while the Aussie got an extra boost as mounting bets for another rate hike fattened yield spreads.

Markets imply around an 80% chance the Reserve Bank of Australia will raise its 3.85% cash rate in May, following an uncomfortably hot reading on January inflation.

Investors doubt the RBA will move as early as its March meeting given the full inflation report for the first quarter is not out until late April.

Speaking on Wednesday, RBA Governor Michele Bullock said patience was needed on policy with the economy so close to balance.

The market is also wagering on around 40 basis points of tightening in total this year, though most analysts think it will stop at 4.10% given this is near to where rates peaked during the post-COVID inflation spike.

“While a recalibration in policy is appropriate, we do not expect a hiking cycle to extend more deeply into restrictive territory,” argued analysts at NAB in a note.

“After a May hike, we see rates on hold for an extended period before the RBA then once again moves to normalise rates back towards neutral by cutting twice in H2 2027.”

In contrast, markets are still pricing in 50 basis points of easing from the US Federal Reserve and Bank of England, and a steady outlook for the European Central Bank.

As a result, Australian three-year bond yields are paying around 80 basis points more than Treasuries, a premium not seen since 2016.

The hawkish divergence saw the Aussie reach $0.7130 , having climbed 0.9% overnight.

Resistance is lined up at the recent three-year top of $0.71465, followed by the 2023 high at $0.7158 and then $0.7282.

It also surged on the crosses to reach levels not seen since 1990 on the Japanese yen at 111.45, and a one-year peak on the euro at 0.6036.

The kiwi dollar was firmer at $0.6005, after adding 0.6% overnight.

However, it again lost ground to the Aussie, which shot to its highest since mid-2013 at NZ$1.1890.

The Reserve Bank of New Zealand recently underlined the need to keep policy accommodative, leaving markets not fully priced for a hike until December.