The Australian dollar soared to a one-month high on the US dollar on Friday and surged against the euro, as an upbeat outlook from the country's central bank led investors to price in higher interest rates. The Australian dollar surged to a month-high at $1.0190, up 3 percent in the week, making the Aussie the star performer of all the major currencies.
The currency, which was already flying high in early trade after an overnight rally, received another boost when the Reserve Bank of Australia (RBA) played down the drag from floods and predicted strong growth at home and globally over the next couple of years, leading investors to price in higher interest rates ahead.
Markets are now pricing a 38 basis points of tightening in the next 12 months, up from 20 early this week when Cyclone Yasi was bearing down on Queensland. In the end, Yasi did less damage than feared and the rebuilding task will only add to growth going forward.
"Given that every major central bank is looking to keep rates on hold... this adds to the appeal of the Aussie," said David Scutt, a currency trader at Arab Bank Australia.
He expects a rate hike in May or June, and possibly another one later in the year. The bullish assessment sent Australian bond futures sharply down, with the three-year contract off 0.14 points at 94.710 and the 10-year contract off 0.09 points at 94.290.
The RBA estimated that while the recent floods in Queensland would trim gross domestic product (GDP) growth by around 0.5 percentage points this quarter, rebuilding would then lift annual growth to a rapid 4.25 percent by year-end.
The central bank left its cash rate unchanged at 4.75 percent at its February board meeting this week, having previously hiked by 175 bps since October 2009. Resistance is now at its January 3 high of $1.0248, before the 28-year high of $1.0257, with support at $1.0083.
The rise in the Aussie was also helped by overnight comments made by Federal Reserve Chairman Ben Bernanke that the US economy still needs help from the central bank despite signs of improvement. The single currency dived to a two-week low of A$1.3358, representing a weekly loss of 2.6 percent. Recently investors had been buying euro/Aussie on a view the ECB would start to tighten while the RBA stayed on hold because of the floods. The New Zealand dollar was stuck around $0.7732 in late trade, after a $0.7725/$0.7747 range, having retreated from a $0.7830 high earlier in the week.