Australia, NZ dollars supported by yield cushion, climb versus yen

By Wayne Cole

SYDNEY, Feb 5 (Reuters) - The Australian and New Zealand dollars were steady on Thursday against their U.S. counterpart, supported by widening yield differentials, while the Aussie climbed to a 35-year peak against the Japanese yen.

The Aussie was flat at $0.7000 AUD=D3, having dipped 0.3% overnight and away from the recent three-year top at $0.7094. Support lies at $0.6908 and $0.6835.

Against the yen, it continued to rise ahead of Japan's election on Sunday, peaking at 110.15 AUDJPY=R, a level not seen since late 1990.

The kiwi dollar held at $0.6005 NZD=D3, after slipping 0.7% the previous session in the wake of mixed labour data. Resistance lies at the recent high of $0.60925, with support at $0.5990 and $0.5853.

Both currencies have been underpinned since the Reserve Bank of Australia hiked interest rates a quarter-point to 3.85% on Tuesday and left the door wide open to further tightening.

Markets imply around an 80% chance the RBA will hike to 4.10% at its May policy meeting, and a 50% probability rates could end the year at 4.35%. 0#AUDIRPR

The hawkish shift has hit the short-end of the Australian bond market sending three-year bond yields AU3YT=RR up to 4.303% and near their highest since late 2023.

The rise in yields also widened the spread over U.S. Teasuries to 68 basis points, the largest premium since 2016, when the Aussie was trading around $0.7500.

"The positive AUD-USD rate spreads from 1-year to 15-years imply AUD/USD at $0.7150, leaving some space to the topside but not a huge amount," analysts at JPMorgan said

They noted yields were now higher than when the cash rate peaked at 4.35% in late 2023 and inflation was running above 4.0%, suggesting a lot of tightening was already priced in.

In New Zealand, a decade-high in the jobless rate saw markets defer a first rate hike to October from September. Pricing for a move by July has gone to 40%, from 60% before the data. 0#NZDIRPR

"The degree of slack still in the labour market should provide the RBNZ with comfort that inflation will return to the 2% target this year with wage growth far from a source of inflationary pressure," said Mary Jo Vergara, a senior economist at Kiwibank.

"So overall, we remain of the view that rate hikes remain a story for 2027."