The Australian dollar rose for a third day on Thursday, posting its biggest ever three-day gain, on an improvement in risk appetite and after comments from a top central banker that challenged expectations of a steep interest rate cut.

Reserve Bank of Australia (RBA) Deputy Governor Ric Battellino argued that Australia’s high inflation could limit room for manoeuvre on interest rates, leading some investors to modestly reprice chances of a big interest rate cut [nSYD397444].

“The Aussie has got a lift from the rebound in regional stock markets and comments from the deputy governor who suggested that rate cuts might not be as aggressive as markets are pricing,” said Joseph Capurso, currency strategist at Commonwealth Bank.

“But I think, with global growth worries still very much alive, the Aussie could run out of steam at $0.6900.”

By 4:15 p.m. the Aussie had advanced to a one-week high of $0.6832 against the U.S. dollar from $0.6363 late here on Wednesday, jumping over 13 percent since it struck a 5- year low of $0.6007 earlier this week.

It rose to as high as $0.6890 during the session.

It had collapsed to six-year lows against a basket of major currencies on Monday. By Thursday, however, the Aussie had recovered over 10 percent.

The Aussie was also buoyed by widening rate differentials after the U.S. Federal Reserve cut rates by 50 basis points.

Interest rate differentials between two-year Australian and U.S. government bonds widened to 270 basis points from 256 points late here on Wednesday, making local assets a bit more attractive to investors.

The Fed lowered rates to stave off the threat of a deep recession in the economy and sounded bearish about the economy, contributing to the U.S. dollar’s biggest daily fall in 23 years on Wednesday.

The Aussie rallied against the Japanese yen, rising to 67.24 yen from 61.43 yen late here on Wednesday, as demand for leveraged carry trades received a huge boost from higher regional stock markets.

Australian December bill futures fell 0.170 points to 95.00, but are still pricing in chances of a 100 basis points by the RBA in the next two months as the central bank steps up its efforts to cushion the economy from the credit crunch.

Australian bond futures were mixed, with the short end hurt by easing safe-haven inflows. The three-year bond futures were 0.05 points down at 95.53, while the 10-year futures contract were flat at 94.785.

—————(Snapshot at 4:15p.m./0515 GMT)—————–

FUTURES CASH YIELD

90-DAY BILL (DEC) 95.000(-0.170) 5.90 (5.87)

3-YR BOND (DEC) 95.530(-0.050) 4.46 (4.36)

10-YR BOND (DEC) 94.785( 0.000) 5.22 (5.16)

AUD/USD 0.6832 (0.6363) US 10-YR 3.88 (3.83)

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AUD VS 2-YR 10-YR *AUD 3-YR/10-YR SPREAD

USD +270 (+256) +134 (+132) *FUTURES +0.745 (+0.790)

CAD +218 (+206) +147 (+147) *AUD 2-YR/10-YR SPREAD

NZD -146 (-154) -83 ( -84) *CASH +97 (+102)

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Source: http://www.afxnews.com

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