Australian dollar zooms past yen as yields keep climbing

By Wayne Cole

SYDNEY, Dec 10 (Reuters) - The Australian and New Zealand dollars were on firm footing on Wednesday as a continuing surge in local bond yields whetted the appetite of carry traders, helping the Aussie break to a 16-month peak on the yen.

The Aussie held at $0.6642 AUD=D3, having firmed 0.3% overnight even as the greenback gained elsewhere. It briefly touched a three-month top of $0.6654 before running into resistance and looks set to test the September high of $0.6707.

The kiwi dollar was steady at $0.5775 NZD=D3, after stretching as far as $0.5795 overnight. A break of $0.5801 resistance would open the way to $0.5844.

Both benefited from a sudden drop in the yen, which saw the Aussie jump 0.8% to as far as 104.30 AUDJPY=EBS and levels last seen in July 2024. The top back then was 109.39.

The Aussie initially took off on Tuesday when the head of the Reserve Bank of Australia surprised many by taking a decisively hawkish turn on rates, ruling out further cuts and flagging the risk of hikes as soon as February should inflation not slow.

Markets swung sharply to imply a 30% chance of a quarter-point rise in the 3.60% cash rate at the RBA's next meeting on February 3, and a near 100% probability by May. 0#AUDIRPR

"We are pulling forward the timing of our forecast for the RBA's first rate hike to Q2 2026, from Q4," said George Tharenou, an economist at UBS.

"Our base case is still also that the RBA will hike rates twice to 4.10% and then pause and assess for some time, albeit the risks remain skewed to the upside."

PRICING FOR A LIMITED TIGHTENING CYCLE

Bonds took it badly with 10-year yields spiking to a two-year high of 4.804% AU10YT=RR, a rise of 37 basis points in little more than two weeks.

Three-year bond futures YTTc1 dived as investors rushed to price in the prospect of higher rates going forward. The contract matched a trough from 2024 at 95.760 and a break here would open the way to 95.480, or 4.52%.

Prashant Newnaha, a senior rates strategist at TD Securities, noted yields had traded between 100 and 200 basis points above the cash rate in some previous tightening cycles.

However, investors were assuming any tightening cycle this time would be limited given the RBA had only cut by a modest 75 basis points this year.

"This implies yields getting to as high as 4.20-4.30%," he added. "The hawkish tone from the RBA is likely to reaffirm the street's bias to sell rallies in rates.

"It also underwrites our upbeat AUD view, which continues to have the highest positive trading weight in our macro quant portfolio."