SYDNEY: The Australian and New Zealand dollars hovered near multi-week highs on Thursday, as the greenback retreated after the Bank of Canada unexpectedly opted for a smaller hike overnight, fuelling hopes for a pivot in the global tightening cycle.

The Aussie was standing tall at $0.6494, after jumping 1.6% overnight to as high as $0.6511, the highest level in three weeks.

The next major resistance is around $0.6540.

The New Zealand dollar was trading at $0.5835 - the strongest since late September, having also surged 1.3% in the previous session.

Resistance is seen around $0.5850. On Wednesday, the Bank of Canada announced a smaller-than-expected rate rise of 50 basis points, joining the Reserve Bank of Australia in slowing the pace of rate hikes.

It also said the bank was getting closer to the end of its historic tightening campaign.

That fuelled bets that the Federal Reserve may consider a deceleration of its aggressive policy tightening in the months ahead, sparking another round of risk-on rally, as US yields eased and the safe-haven dollar pulled back.

That also helped investors dial back expectations that the terminal cash rates in Australia would have to reach 4.2% after the blockbuster inflation readings on Wednesday. Rates are now seen peaking around 4.1%.

Bill Evans, chief economist at Westpac, now expects the RBA to raise the cash rate by 50 basis points in November, given the inflation surprise.

ANZ, CBA and NAB still expect a 25bp hike. “The best way for the central bank to break this (inflation)nexus is to adopt strong rhetoric and strong action,” said Evans.

Australia, NZ dollars enjoy respite in risk-on rally, bonds sell-off on hot inflation

“We do not believe that the Board has backed itself into a corner with its surprise, lower-than-expected 25bp increase at the October meeting.”

Australian government bonds rallied on Thursday, tracking global peers.

The yields on the three-year contract fell 12 basis points to 3.426% and the yields on ten-year contract eased 9 bps to 3.87%.