The Australian dollar held near multi-month peaks on Monday, after speculation the US Federal Reserve may have to delay scaling back its stimulus program encouraged yield-hungry investors to pile on carry trades.
The dollar was fetching 96.70 US cents in late trade, just below 4-1/2-month high of 96.80 US cents it hit Friday night.
On a trade-weighted basis, the Aussie jumped to 73, its highest since mid-June and scaled a fresh 4-1/2 month peak against the yen at 94.76 yen. It looked set to test 95.88 yen, the 50 percent retracement level of the April-August fall.
Much of the Aussie's recent strength is due to broad US weakness on growing expectation the Fed will extend its cheap money policies into next year.
In contrast, the market is wagering the Reserve Bank of Australia (RBA) is done with its easing cycle, with swap markets pricing in 4 basis points of tightening on a one-year horizon.
The diverging monetary policy outlook encouraged investors to borrow at low rates in US dollar and yen to buy the relatively high yielding Aussie and kiwi currencies.
Next flash point is the US September nonfarm payrolls report due on Tuesday ahead of the Australian inflation report a day later.
Forecast of annual underlying inflation is 2.1 per cent, which is near the bottom of the RBA's 2-3 per cent target bend.
"Even if the report prints to the downside of consensus, we are unlikely to see the RBA shift its stance from the currently staunchly neutral," said Annette Beacher, head of Asia Pacific research for TD Securities in Singapore, seeing rates on hold at a record low of 2.5 per cent until late 2014.
Since Friday, the Australian dollar has been rallying on the back of strong Chinese economic growth figures and the increasing expectation that the US Federal Reserve will maintain its economic stimulus program.
There was speculation in September the program would be wound down, but those expectations have changed since the two-week US government shutdown.
ForexCT head of research Steven Dooley said the Australian dollar lost some ground late in the morning but he expected the currency to resume its rally.
‘‘I just think we might see a little bit of a retracement in Monday trade,’’ he said. ‘‘There was a super-strong move particularly in the US dollar, the euro and the pound at the end of last week.
‘‘We think the Aussie dollar is still likely to push a little bit higher later in the week, but in the near term a move back to 96 US cents is likely to be on the cards.
‘‘I think traders were betting on a Monday-morning retracement.’’
Mr Dooley expected the Australian dollar to trade in a range between 96 and 97 US cents over the next 24 hours.