The Australian dollar edged closer to a 33-year high against the Japanese yen on Tuesday as rising bond yields made it an attractive destination for carry trades, while fuelling further gains in its New Zealand cousin.
With the market expecting stable or even higher interest rates, Australian 10-year yields hit a two-month high of 4.508% overnight.
As a result, the Australian dollar hit its highest level since mid-1991 at 107.93, bringing its year-to-date gains to almost 12%. The next target is a 1990 peak of 123.70.
The upbeat outlook for domestic rates was underlined by minutes from the Reserve Bank of Australia’s (RBA) latest meeting, which showed there was much discussion about whether policy was tight enough to ensure inflation would slow as desired.
Markets are pricing in about a 32% chance the RBA will raise its 4.35% bank rate at its next meeting in August, with little chance of it cutting it before July next year. “The debate in the minutes illustrates a strong reluctance to raise the cash rate again given weak output growth, but also shows the Board is less comfortable with its current approach given the upside risks to inflation,” said Tapas Strickland, head of market economics at NAB.
“We expect the RBA board to stick to its strategy of slowing inflation back to target to maintain labour market gains, and rates to remain on hold until May 2025.”
In New Zealand, recent economic data has been below expectations, with a business survey released on Tuesday showing confidence deteriorated sharply in the second quarter as high rates weighed heavily on demand.
Markets are pricing in a 60% chance that the Reserve Bank of New Zealand (RBNZ) will ease monetary policy as early as October and cut rates by 124 basis points by the end of 2025.
That’s one reason the Australian dollar hit a seven-week high of NZ$1.0982, moving closer to its May peak of NZ$1.1030.
The kiwi dollar also suffered a further fall, hitting a six-week low of $0.6051, after breaking above its 200-day moving average of $0.6069.
The Australian dollar fell 0.2% to $0.6642, putting it back in the middle of the $0.6576/$6714 range that has held for about the past six weeks.
