The Australian dollar advanced to recent highs against the U.S. currency and the yen on Monday, sidestepping a raft of soft economic reports, lifted by improved appetite for riskier assets and higher-yielding currencies. Buying in these asset classes re-emerged on hopes that a raft of interest rate cuts by major central banks across the globe would help the world economy escape a deep recession.

The European Central Bank, the Bank of England and the Reserve Bank of Australia (RBA) are all expected to lower rates this week by at least 50 basis points to support their struggling economies. That would follow cuts by the U.S. Federal Reserve, the Bank of Japan and the Chinese and Indian central banks last week.

“There are concrete signs that the bold action by governments and central banks is paying dividends,” said John Kyriakopoulos, currency strategist at National Australia Bank.

“The rise in industrial metals prices, improvement in investors’ risk appetite and widening in the Aussie-U.S. two-year yield spread have boosted our short-term model’s ‘fair value’ estimate for the Aussie. The top end of the estimate is $0.6950.”

By 4:15 p.m. (0515 GMT), the Aussie had risen to $0.6816 against the U.S. dollar, up 1.3 percent from $0.6729 late here on Friday. It has gained over 10 percent since it struck a 5-½ year low of $0.6007 last last month. The Aussie had eased to around $0.6675 during the session after weaker-than-expected retail sales data and a soft private jobs survey reinforced expectations of steep interest rate cuts by the RBA in the coming months.

Demand for carry trades helped the Aussie advance to recent one-week highs of 68.06 yen from 66.26 yen late here on Friday. The Aussie lost 15 percent last month as investors unwound carry trades and dumped currencies of commodity producing countries on expectations that a global recession would hurt demand for natural resources. Australia is a big exporter of commodities.

The Aussie lost 21 percent against the yen over October as investors rushed to the safety of lower-yielding currencies and government debt amid extreme risk aversion.

Australian bill futures extended gains, as investors priced in aggressive rate cuts by the RBA before year-end.

Investors have fully factored in a 50 basis point cut on Tuesday, when the RBA’s monetary policy board meets. That follows a stunning 100 basis point cut to 6 percent last month.

Australian bond futures were lower as safe-haven inflows eased. Three-year bond futures fell 0.085 points to 95.420, while the 10-year futures contract shed 0.200 points to 94.620.

The longer end fell more sharply, helping the yield curve steepen further, while the spread between the two-year Australian and U.S. government yields rose to 276 basis points from 271 points on Friday.

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

FUTURES CASH YIELD

90-DAY BILL (DEC) 95.040(+0.030) 5.62 (5.81)

3-YR BOND (DEC) 95.420(-0.085) 4.58 (4.47)

10-YR BOND (DEC) 94.620(-0.200) 5.39 (5.19)

AUD/USD 0.6816 (0.6832) US 10-YR 3.96 (3.94)

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

USD +276 (+271) +142 (+125) *FUTURES +0.800 (+0.705)

CAD +231 (+223) +163 (+150) *AUD 2-YR/10-YR SPREAD

NZD -142 (-149) -68 ( -88) *CASH +106 (+93)

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Source: http://www.afxnews.com

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