AUD and NZD Soar on Risk-On Sentiment and Softened Rate Outlook

The Australian and New Zealand dollars have reached multi-week highs as traders weigh potential Japanese yen support and rule out an interest-rate hike from the Reserve Bank of Australia next week.

This shift in currency markets is driven by two intersecting storylines. On one hand, a more optimistic 'risk-on' mood has supported higher-yielding currencies like AUD and NZD, despite investors keeping a close eye on Japan's willingness to intervene in yen strength. On the other hand, Australia's rate outlook has softened following a surprise decline in inflation, making it nearly impossible for the RBA to raise its 4.35% cash rate at its next meeting.

The change is evident in bonds: Australian 10-year yields have fallen and the gap versus US Treasuries has narrowed sharply, reducing one of AUD's main supports, the extra interest earned by holding Australian assets.