The Australian dollar consolidated near a two-and-a-half month high on Monday ahead of a widely anticipated rise in the 5.75 percent cash rate that will lock in a wider rate advantage over the US dollar. The Aussie dollar steadied in a tight $0.7650-$0.7678 range, paring its gains after advancing as high as $0.7685 offshore on Friday.
Stronger-than-expected borrowing figures for June added to the risk of a further 25-basis-point rate rise to 6.25 percent by year-end, but investors were cautious ahead of the rate announcement due on Wednesday at 9:30 am (2330 GMT, Tuesday).
Private sector credit rose 1.2 percent in June, above an expected 1.1 percent rise, despite an increase in borrowing costs from a 25-basis-point tightening imposed in May.
"Strong credit growth is a pointer to the resilience of the economy and adds to the case for why one more 25 basis point increase in the cash rate may be insufficient to deal decisively with the problem of rising inflation," said Stephen Roberts, director of research at Grange Securities.
The Aussie leapt into higher territory above 76 US cents last week after data showed a jump in producer prices and an acceleration in consumer inflation to 4 percent.
The Aussie dollar traded at $0.7657/59, still facing resistance around $0.7680/85. It lifted off an intraday low at $0.7650 after Treasurer Peter Costello pledged to continue in his role, erasing market uncertainty after Prime Minister John Howard quashed Costello's leadership hopes by declaring he would not stand aside.
However, the Aussie retraced slightly versus the kiwi dollar after testing resistance offshore on Friday at NZ$1.2432, a four-and-a-half year high. It retained an upward bias with no scope seen for higher New Zealand rates this year.
Market economists polled by Reuters all expect the Reserve Bank of Australia (RBA) to raise the cash rate to 6 percent on Wednesday, while soft US growth figures have increased the chance of a pause in US rates next month.
A subsequent plunge in US bond yields forced a widening in the Australia-US two-year bond yield spread over 100 basis points to levels unseen since December 2001 and provided fundamental support to the Aussie dollar.
"Despite some intense political opposition to higher rates here, changes to the US rate outlook and falling US bond yields are lending extra support to the Aussie dollar," said Tony Morriss, senior currency strategist at ANZ Investment Bank.