The Australian dollar was strong near two-year highs on Wednesday as bets that super-loose US monetary policy may ease even further led investors to search for yield.
The Australian dollar flew high at $US0.9583, briging gains so far this month to a whopping 7.5 per cent. Its high-yield appeal was clearly in focus, especially after the Federal Reserve signalled it may further ease policy, to the detriment of the US dollar.
Add to that, growing market expectations for Australian interest rates to rise to 4.75 per cent as soon as next month, from 4.5 per cent now, and some analysts predict the Aussie dollar could retest its 2008 high of $US0.9851 in weeks ahead.
"The contrast in US monetary policy and that in Australia could not be starker," said Greg Gibbs, an analyst at RBS. "We have seen some profit-taking on the Aussie dollar in recent sessions, (but) the risks are still biased towards an extended period of gains to test the high of 2008 at $US0.9850."
Underscoring the Aussie dollar's yield allure, the spread between two-year Australian and US yields widened to 445.5 basis points, the widest in over two years.
A series of hawkish remarks from the Reserve Bank of Australia (RBA) this week highlighting the need for monetary policy to respond to Australia's mining boom has led investors to price in a 63 per cent chance of a rate rise on October 5.
In a sign investors were once again getting excited about rate rises in Australia after a four-month hiatus from the RBA when it refrained from raising rates, the domestic cash yield curve was at its flattest in two years at 18 basis points.
As part of betting on a flatter curve, 10-year bond futures managed to bounce 0.045 points to 94.87.
Reuters