Surging bond yields underpin Aussie dollar; kiwi near 1-month high

[SYDNEY] The Australian dollar held above the key level of 80 cents on Wednesday as yields on government bonds hit their highest since late 2015, while more domestic banks predicted the central bank will hike rates next year.

Australian government bond prices have fallen sharply in the past week, outpacing even the drop in US Treasuries. As a result, the spread between local two-year yields and those in the United States has reached its widest since February.

The move is in line with an increase in yields seen in Canada and Britain as central banks there turn hawkish.

Higher yields have supported the Australian dollar, which held at key chart resistance around 80 US cents after rallying to a 2-1/2 year peak of US$0.8125 earlier this month.

The attraction of rising yields to investors was underlined at Wednesday's Australian government bond tender for A$600 million (S$648 million) in 2021 paper. It drew 41 bids worth a hefty A$4.49 billion, yet one bidder paid enough to walk away with the whole issue.

While the Reserve Bank of Australia (RBA) is wedded to its neutral stance on policy, analysts at ANZ and National Australia Bank expect it to lift rates by 50 basis points in 2018.

The futures market implies a 74 per cent chance of a rate hike in May 2018, with a 25 basis point increase by August fully priced in.

ANZ's view "reflects an outlook for growth that is a touch more positive," it said a note to clients.

"Our confidence in looking for rate hikes in 2018 is boosted by the hawkish shift in the RBA's language."

For 2018, ANZ has forecast economic growth of 2.9 per cent, then 3 per cent in 2019, with the unemployment rate declining to 5.3 per cent by the end of next year from 5.6 per cent now.

Elsewhere, investors will keep their eyes peeled for the outcome of the Federal Reserve's two-day meeting on early Thursday Australia time.

Analysts widely anticipate Fed policymakers will lower of monthly bond purchases, starting in October. The market is evenly divided on the probability of a rate increase at the Dec 12-13 meeting.

The New Zealand dollar rose 0.4 per cent to US$0.7338, not far from a one month high of US$0.7344 touched last week.

Investors were still wary ahead of a hotly-contested election on Saturday in which polls show the ruling National party neck-and-neck with the opposition Labour party.

New Zealand government bonds slipped, sending yield 4.5 basis points higher across the curve.

Australian government bond futures eased too, with the three-year bond contract down two ticks at 97.770. The 10-year contract edged 1.5 ticks lower to 97.1400.

REUTERS