Australian dollar holds near 12-week peaks, bonds slide on rate risk

The Australian dollar surged to near 12-week peaks on Thursday, buoyed by expectations of an imminent interest rate increase following robust inflation and spending figures. The currency climbed 0.2% to trade at $0.7184, reaching a 12-week high of $0.7189. However, it is now encountering resistance at the $0.7200 and $0.7277 levels. Meanwhile, the supportive floor is around the $0.7110 and $0.6920 mark.

Australia's household spending rose by 1.1% in July, data revealed on Thursday, suggesting that consumer demand remained robust despite rising borrowing costs. This surge in spending, coupled with a recent inflation report, has sparked speculation of a rate hike by the Reserve Bank of Australia (RBA) next month. Economists are evenly split on the probability of a rate hike, with 53% favoring such a move.

Jessie Cameron, an economist at the National Australia Bank, explained that the nominal terms of the spending indicator indicate a blend of higher prices and stronger volumes. This outcome could signal elevated inflation or resilient household demand. Citi has also projected a rate hike in September, attributing it to the resilient household spending and persistent inflation.

The benchmark three-year government bond yields increased by 7 basis points to 4.682%, marking the highest level in a month. Similarly, ten-year bond yields climbed by 8 basis points to 5.095%, the highest since May. On the other hand, the New Zealand dollar experienced a marginal gain of 0.1% to $0.5952, following a 0.5% decline the previous day due to the strong US inflation data.

The RBA is expected to meet next Wednesday, with markets indicating a 96% chance of a 25 basis point rate hike to 2.75%, marking the second consecutive rate increase. Analysts anticipate rates could reach 3.0% by December and 3.5% next year as the central bank transitions from aggressive stimulus to a more neutral policy stance.