Australian dollar near 3-year peak as rate bets ramp up

By Wayne Cole

SYDNEY, Jan 28 (Reuters) - The Australian dollar paused near three-year peaks on Wednesday as a selloff in the greenback turned into a rout, while a hot set of inflation figures at home ramped up the chance of a rate hike as soon as next week.

The Aussie was enjoying the view at $0.6994 AUD=D3, climbing 1.4% overnight to as high as $0.7016. That was the first visit to 70 cents since early 2023 and left the Aussie up more than 4% in just five sessions. The breach of the $0.69435 resistance triggered further momentum buying and targets $0.7158 next.

It got a further lift when Australian data showed a key trimmed mean measure of core inflation rose 0.9% in the December quarter, above forecasts of a 0.8% increase.

The annual pace quickened to 3.4%, up from 3.0% the previous quarter and the fastest in more than a year. It was also above the Reserve Bank of Australia's target range of 2% to 3%, setting the scene for a hike when it meets on February 3.

Markets now imply a 70% probability of a quarter-point rise in the 3.6% cash rate, up from 60% before the data. An increase to 3.85% is fully priced in by May, with 4.10% seen by September. 0#AUDIRPR

Analysts at ANZ responded by changing their call to a hike next week, though they assumed it would be one and done, as inflation should moderate through this year.

Abhijit Surya, a senior APAC economist at Capital Economics, looks for rate rises in both February and May.

"Household spending has been growing strongly, business investment is rising in tandem, and the labour market is also tightening," he argued. "All of these factors will fuel the RBA's concerns that the economy is operating above potential."

Yields on 10-year bonds AU10YT=RR were left at 4.82%, after hitting their highest since late 2023 overnight at 4.901%. The spread over Treasuries stood at 58 basis points, offering an attractive premium to the out-of-favour U.S. dollar.

The New Zealand dollar was also firm at $0.6030 NZD=D3, after surging 1.2% overnight to clear $0.6007 resistance. The next targets are $0.6059 and $0.6120.

The Reserve Bank of New Zealand next meets on February 18 and is considered certain to hold rates at 2.25%, though again investors believe the next move will be up. 0#NZDIRPR