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[SYDNEY] The Australian and New Zealand dollars slipped against a broadly firmer US currency on Thursday, but surging yields at home helped deliver sharp gains on lower-yielding competitors including the yen and Swiss franc.
The Australian dollar backtracked to US$0.8010, from a peak of US$0.8105, while the kiwi eased to US$0.7333 from a top of US$0.7436.
The retreat came after the US Federal Reserve stuck with plans to hike rates in December despite subdued inflation and the economic impact of recent hurricanes.
The hawkish outlook sent Treasury yields to six-week highs and caught the market short of US dollars.
Yet Australian and New Zealand yields have risen even faster and made the currencies attractive to carry trade investors. That was especially so against the Japanese yen and Swiss franc where policy is being kept super-loose.
Yields on Australian three-year bonds have shot up in the past two weeks to reach levels not seen since late 2015. The spread over Japanese bonds has in turn ballooned out to 236 basis points, the widest since December 2014.
Investors responded by lifting the Aussie to a near two-year top on the yen at 90.30, bringing gains to 3.9 per cent in eight sessions. It also made a bullish break of a double-top from July at 89.33 and 89.42, opening the way to another chart target at 91.23.
The kiwi has likewise sped from 78.00 yen to a current 82.50. Yields on New Zealand's 10-year paper have climbed 33 basis points in little more than a week to hit their highest since May at 3.08 per cent.
The shift higher in yields has been partly a response to a hawkish turn by some central banks abroad, notably in Britain and Canada, and to a run of strong jobs numbers in Australia.
This has led the futures market to price in more chance of an earlier rate hike by the Reserve Bank of Australia (RBA), even though policymakers have shown no inclination to move.
A hike to 1.75 per cent is now almost fully priced in by July next year, while both NAB and ANZ recently changed their views to tip two hikes in the second half of 2018.
There is thus much focus on a speech by RBA Governor Philip Lowe later on Thursday to see if the bank might be reconsidering the outlook for steady rates.
"The past few weeks have seen an interesting switch by financial markets towards more optimistic views on the global and domestic growth outlooks," said Michael Workman, a senior economist at CBA. "We do not expect the RBA to lift their cash rate till late 2018. But the risk of an earlier move is building."
Data from New Zealand on Thursday showed the economy expanded by 0.8 per cent in the second quarter, boosted by growth in exports, tourism and population.