Australian dollar gains

09 Feb, 2008

The Australian dollar firmed above 89 US cents on Friday, recovering from a one-week low offshore, as investors chased the high-yielding currency on the prospect of further domestic interest rate hikes. Still, gains were capped by lingering risk aversion with many investors sidelined ahead of a weekend meeting of finance ministers from the Group of Seven in Tokyo.
The recent market turmoil and a US economic slowdown are likely to be discussed at the meeting. The Aussie traded near a decade high against the British pound after the Bank of England cut rates by 25 basis points, further enhancing the Aussie's yield advantage.
It also hovered near three-month highs against the euro after the European Central Bank President Jean-Claude Trichet said growth risks are towards the downside, cementing expectations for rate cuts later in the year. In contrast, markets are factoring in a 30 percent chance the Reserve Bank of Australia (RBA) lifts rates as early as March as it tries to cool inflation.
"The yield argument has been supportive of the Aussie today with rates here expected to go up again, possibly as early as next month," said Jonathan Cavenagh, currency analyst at Westpac Banking Corp.
The central bank releases its quarterly monetary policy statement on Monday and is expected to offer more cues on the direction of interest rates. The Aussie had nudged up to $0.8950/55 from $0.8928/32 late here on Thursday, having fallen to a one-week low of $0.8874 in offshore trade.
The Aussie has drawn support from widening rate differentials over the United States, where the Fed has lowered rates aggressively. The spread between the two-year government bonds has widened to 466 basis points, the highest in more than a decade.
"It seems clear, that the level of Australian rates, relative to the US, offers a very attractive yield to global investors, likely ensuring a steady flow of demand for Aussie dollars to invest in the local interest rate and bond markets," said Stephen Halmarick, co-head of economics and markets at Citigroup.
The Aussie rose to 96.09/19 yen from 94.86/96 yen late here on Thursday as investors cautiously returned to carry trades. Expectations that rates in Japan are likely to remain low were bolstered after a lower-then-expected reading of core machinery orders data for December.
Australian bond futures eased on growing expectations of another domestic rate hike and a sell-off in US Treasuries after a poorly received auction of 30-year paper. Three-year bond futures lost 0.05 points to 93.405, while the 10-year bond contract eased by 0.07 points to 93.80.

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