AUD and NZD Surge as Traders Reassess Rate Hike Bets

The Australian and New Zealand dollars have surged to 10-week highs as traders reassess their expectations for a near-term Federal Reserve rate hike. The US dollar has weakened, pressuring the currency.

Soft US inflation data and a surprise drop in retail sales have pushed markets towards a Fed hold next month, now priced at about 71%. This shift in expectations has benefited currencies like the Australian dollar (AUD) and New Zealand dollar (NZD), which tend to rise when investors feel more comfortable taking risk elsewhere.

The AUD has climbed to around $0.7098 after breaking above $0.7089, while the NZD rose to roughly $0.5905. The next test for these currencies is local: Australia's wages data and Thursday's jobs report are expected to show 15,000 new jobs with unemployment steady at 4.4%.

If wages and jobs come in firm, investors may reprice the Reserve Bank of Australia's year-end rate path towards 4.6%, widening the expected gap versus US rates. This could attract 'carry' trading, where investors favor higher-yielding currencies like the Aussie.