Australian dollar holds firm as yields hit six-month highs

SYDNEY -- The Australian dollar steadied close to a new peak on Thursday as traders placed bets on an imminent interest rate increase, pushing bond yields to their highest levels in nearly six months. Hawkish remarks from the Reserve Bank of Australia, coupled with inflationary pressure driven by Brent oil surpassing $101 per barrel, have created an 80% probability of a rate hike this month.

Bond markets responded by increasing 3-year yields by 8 basis points to 4.905%, potentially reaching a March high of 4.905%. A breach of this level could bring yields back to levels not observed since mid-2011, triggering a run toward a bearish target around 5.30%.

JPMorgan analysts noted that the Reserve Bank's comments indicated a shift, prompting the board to adopt a risk management approach. They forecast a 25 basis point hike for the September meeting, raising rates to 4.60%. The August labor report is scheduled for September 24, preceding the RBA meeting on September 29. Markets are pricing in an additional 25 basis point increase by early next year, setting a record high for the cash rate since 2008.

The Australian dollar traded at $0.7220, reaching a four-month high of $0.7238 overnight. Its next target is the May peak of $0.7277, followed by historic highs from 2022 at $0.72825 and $0.7661. The currency also hit a 13-year high against the New Zealand dollar at NZ$1.2375, while the euro reached a 21-month low at A$1.6073. The New Zealand dollar rebounded 0.2% to $0.5847, after declining 0.3% overnight amid a fourth consecutive day of losses.

Support for the Australian dollar is at $0.5802, with resistance near $0.5902. The New Zealand dollar has faced pressure since the Reserve Bank of New Zealand announced fewer expected rate hikes than anticipated by investors. The likelihood of a rate hike in October has been reduced to 28%, but a rise in December remains highly probable.