The Australian dollar climbed almost a cent on Tuesday, helped by a relapse in the US currency and a big jump in commodity cousin the New Zealand dollar.
At the local close, the dollar was trading at $US0.8719, from $US0.8627 yesterday, putting it back on track for a test of one-year highs highs of $US0.8776. Against the yen, it edged up to 79.68, from Monday's 79.46.
The US dollar struggled as short-covering ran its course, shaving 0.9 per cent off its basket index.
The Aussie's rally owed much to the Kiwi dollar, which leapt to a 13-month high of $NZ0.7187 after investors got excited about a move by New Zealand dairy exporter Fonterra to raise its estimated payout to farmers.
"The Aussie has been dragged on a run with the Kiwi given it is a commodity play," said Jonathan Cavenagh, a currency strategist at Westpac.
The Aussie and the Kiwi tend to move in tandem against the US dollar as they are seen as a pair of antipodean currencies good for betting on commodity prices. Australia is a big seller of commodities such as wheat, coal and iron ore.
Prospective demand for Australia's commodity exports appeared firm too, with the government forecaster lifting most metals sales forecasts on Tuesday, citing returning demand from China and rising output.
Reuters data showed the Aussie has a strong correlation with the Kiwi dollar, with the daily 30-day log return at 0.9412.
Still, with the kiwi making the running, the Aussie dropped as far as a 5-1/2-month low of $NZ1.2083, although charts still show it may have fallen too far, too fast.
The Aussie hangs near the lower-end of the Bollinger Band at $NZ1.2115, while the 14-day relative strength index stood at 31.4, a spitting distance with the 30-point mark that signals over-selling.
Patrick Bennett, a Societe Generale analyst, said the Aussie should trade within the broad range of $NZ1.20 to $NZ1.30 given Australia's economy is in a far better shape than its neighbour's.
Interest rates in Australia are expected to rise by at least 25 basis points in December from a record low of 3 per cent, while New Zealand rates are seen staying at 2.5 per cent until mid 2010.
"Long Aussie against the New Zealand dollar has been a favoured trade of ours and though our resolve is currently being tested, the New Zealand and Australian economies are currently operating at different speeds," Bennett said.
Reuters