Australia, NZ dollars ride risk rocket to multi-month heights

[SYDNEY] The Australian dollar shot up to a four-month peak on Friday and was on track for its best weekly performance since mid-March, boosted by carry trades as risk-on sentiment dominated globally.

The Aussie breached stiff chart resistance of US$0.7712 overnight and climbed to around US$0.7736. For the week, it is up 1.7 per cent.

The New Zealand dollar stood at US$0.7320, having reached a 5-1/2-month high of US$0.7369 on a timid greenback. For the week, the kiwi is up 0.6 per cent after falling by about that much the previous week.

Traders will keenly watch US inflation data due later in the session, which is likely to determine the US dollar's near-term direction.

The jump in the antipodean currencies followed comments by US Federal Reserve Chair Janet Yellen, who sounded less hawkish than some had feared while reinforcing her message of watching inflation "very carefully".

Her reluctance to rock the boat for markets paved the way for more carry trades, where investors borrow in low-yielding currencies to invest in higher-yielding assets such as the Aussie and the kiwi.

"The clear driver has been super low implied volatility, a general ill-will towards holding USDs, renewed outperformance of emerging markets of which AUD is a proxy in G10 forex circles and with this the propensity to desire to pick up yield or'carry'," Chris Weston, Melbourne-based chief market strategist, IG Markets, said in a note.

Mr Weston added that the Reserve Bank of Australia (RBA) was powerless to cap gains in the Aussie unless it shifted to an explicit easing bias and led the market to believe the next move in interest rates is down, not up.

This would be difficult, given that futures imply a tiny chance of a rate hike as early as November with a move of 25 basis points almost fully priced in by August 2018.

The RBA held rates at a record low 1.50 per cent for an 11th straight month in July, showing absolutely no indication of a hike in the near future.

The Reserve Bank of New Zealand (RBNZ) has also left rates at an all-time low, in this case 1.75 per cent, after easing in November 2016.

New Zealand government bonds eased, sending yields about 4-4.5 basis points higher at the long end of the curve.

Australian government bond futures slipped, with the three-year bond contract down 3 ticks at 97.990. The 10-year contract was off 3.5 ticks at 97.28.

REUTERS