Australian dollar scales 3-week peak as yield spreads widen

By Wayne Cole

SYDNEY, Dec 3 (Reuters) - The Australian dollar hit three-week highs on Wednesday as a reading on economic growth fell short of forecasts but showed more than enough underlying strength to keep yield spreads fattening in its favour.

Data showed gross domestic product rose 0.4% in the third quarter when analysts had hoped for a 0.7% gain. Yet, the miss was all due to a run-down in inventories and domestic final demand jumped a steep 1.2% in the quarter.

Inflation measures were also on the high side while nominal growth ran at a rapid 5.4% for the year, suggesting the economy might not need more policy stimulus.

Reserve Bank of Australia Governor Michele Bullock had earlier indicated the economy was already near its speed limit and policy makers were watching inflation closely.

The Aussie was up 0.2% at $0.6575 AUD=D3, on top of a 0.4% gain overnight. A break of resistance at $0.6580 would open the way to $0.6617.

It was also aided by buying against the Japanese yen, which saw the Aussie hit a 16-month peak at 102.49 AUDJPY=.

The RBA meets next week and is considered certain to keep rates at 3.60%, and to repeat its warnings about inflation risks. Futures have priced out almost any chance of a further cut and imply the next move will be up, albeit not until the end of 2026. 0#AUDIRPR

The hawkish outlook has seen 10-year bond yields AU10YT=RR spike 20 basis points in little more than a week to touch an 11-month peak of 4.65%. That, in turn, has widened the spread over Treasuries to 53 basis points, levels not seen since August 2022.

"Australia's fixed income market continues to stand out as one of the few places where global investors can still find USD-like yields," wrote John Li, head of Asia fixed income credit strategy at J.P. Morgan Private Bank in a note.

"With the Reserve Bank of Australia holding rates at elevated levels, these yields look set to persist."

The bank recommended investors concentrated in U.S. dollar assets diversify into Australia and saw the Aussie reaching a range of $0.6600 to $0.7000 over the next 12 months.

The New Zealand dollar edged up to $0.5748 NZD=D3, after adding 0.2% the previous session. Resistance lies at $0.5751 and $0.5801.

New Zealand's 10-year yields NZ10YT=RR hit a three-month top of 4.51% overnight before easing back a bit. They offer a spread over Treasuries of around 35 basis points.