Australian dollar extends winning streak to ninth week as rate outlook shifts

SYDNEY: The Australian dollar scaled a new three-month peak on Friday, extending a winning streak to nine weeks as a hot inflation report sharply lifted the odds of an imminent rise in interest rates, leaving bonds nursing heavy losses.

The Aussie rose 0.2% to $0.7204, breaking key resistance at 72 cents, with bulls now eyeing the May top of $0.7277, the highest since mid 2022.

It is set for a weekly rise of 0.5% to mark the longest winning streak since 2010. It also outperformed against its major peers, gaining 0.7% on the week against the kiwi, up 0.8% against the Japanese yen and rising 0.7% on the euro.

Three-year government bond yields jumped 10 basis points this week to 4.679%, while 10-year bond yields rose 6 bps to 5.098%, the highest since May.

That was all thanks to a sharp repricing in the Reserve Bank of Australia’s interest rate outlook, with markets now wagering on a 52% probability that the fourth rate hike this year could come as soon as next month. A quarter-point move by the year end is fully priced in, with some risk of another next year.

“Near-term AUD upside risks have increased,” said Ray Attrill, head of FX strategy at the National Australia Bank, although he still sees the Aussie to trade in the $0.6850 and $0.7278 range for the year, given markets could be running ahead of relative rate expectations.

“Medium-term fundamentals remain less supportive: additional tightening should weigh on 2027 growth and ultimately prompt RBA rate cuts, while the Australian yield curve and the prospect of narrower 10-year ACGB–UST spreads point to limited AUD upside.”

All eyes are on the Federal Reserve’s Jackson Hole Symposium where chair Kevin Warsh is slated to speak later in the day, which could determine the near-term direction of the US dollar.

The kiwi dollar edged up 0.2% to $0.5965 on Friday, and was headed for a weekly drop of 0.2%. Major resistance is around the double top at around $0.5990.

The Reserve Bank of New Zealand meets next Wednesday, and markets imply a 96% chance it will lift the official cash rate 25 bps to 2.75%, its second hike in a row.

The key uncertainty would be whether the central bank signals a third rate hike in October.

Investors see rates reaching 3.0% by December and near 3.5% next year as the central bank shifts from outright stimulus to a more neutral policy stance.