Australian dollar extends rally as markets swing toward rate rise

By Wayne Cole

SYDNEY, Dec 4 (Reuters) - The Australian dollar pushed to a five-week peak on Thursday as surprising strength in domestic spending data pushed bond yields higher, while soft U.S. jobs figures restrained the greenback.

The Aussie edged up 0.1% to $0.6607 AUD=D3, bringing gains for the week so far to 0.8% and cracking resistance at $0.6580. The next chart barriers are at $0.6617 and $0.6628.

The New Zealand dollar held at $0.5773 NZD=D3, having risen 0.6% for the week so far. It faces resistance at $0.5801 and $0.5844.

The Aussie was already benefiting from a solid scorecard on economic growth when figures on household spending showed a startling 1.3% jump for October, the biggest increase since early 2024 and a rousing start to the current quarter.

Investors responded by ramping up the risk that the next move in interest rates will actually be upward, with an increase as soon as May now priced at 50%. 0#AUDIRPR

The Reserve Bank of Australia meets next week and was already considered certain to hold at 3.60% following three quarter-point cuts so far this year.

"The upshot is that it's all but certain that the RBA is done cutting rates this cycle," said Abhijit Surya, a senior economist at Capital Economics.

"If anything, the risk is that the bank will feel compelled to tighten policy before long."

Speaking on Wednesday, RBA Governor Michele Bullock was optimistic that inflation would slow again after a spike in recent months, but she also noted the economy was bumping up against its speed limits.

Analysts suspect the RBA board will now turn more hawkish in its policy statement.

"We expect the RBA to stay on hold but express openness to a rate hike should the economy strengthen materially from here," said Carl Ang, a fixed-income analyst at MFS Investment Management.

"The base case remains for a prolonged hold as the labour market gradually softens," he added. "However, the balance of risks are clearly tilting towards a rate hike, likely sometime in the second half of 2026 at the earliest."

Yields on 10-year paper AU10YT=RR hit their highest point since January at 4.687%, having climbed 23 basis points in little more than a week. The spread over Treasuries has yawned out to 59 basis points, the largest premium since August 2022.

Three-year bond futures YTTc1 have shed 28 ticks in the same period to hit 95.955, threatening major support at 95.90.