Australian Dollar Reaches Parity with Canadian Dollar Amid Rate Outlook Divergence

Key Takeaways

The Australian dollar hit parity with its Canadian counterpart for the first time in over eight years.
The Reserve Bank of Australia is expected to hike rates to 4.6% this year, while the Bank of Canada has held rates steady.
The Aussie's strength is driven by expectations of further rate hikes, while the loonie faces pressure from lower oil prices.

The Australian dollar has reached parity with its Canadian counterpart for the first time in over eight years, driven by diverging rate outlooks between the two countries.

The Reserve Bank of Australia (RBA) is expected to hike rates to 4.6% this year, with a fourth hike on September 29 all but confirmed. The Bank of Canada, however, has held rates steady at 2.25% for nearly a year, as inflation remains subdued and a trade war with the US clouds the economic outlook.

The Aussie's strength against its major peers has been driven by a sharp shift in the RBA's rate outlook, with the currency trading at C$1.0004 on Wednesday after climbing 0.2% overnight to hit an 8-1/2-year top of C$1.0012.

The Australian dollar was also hovering near a 15-month high against the euro at A$1.6082 and not far from a three-month peak on sterling at A$1.8753, reflecting its strength in the global market.

Against the US dollar, the Aussie was flat at $0.7113, having slipped 0.1% overnight. It faces resistance around $0.7140 and has support at $0.7075.

All eyes are on the jobs data on Thursday, where forecasts are centred on a rise of 20,000 jobs in August, with the unemployment rate holding steady at 4.5%. A sharp and unexpected jump in unemployment could derail bets on a rate hike next week after RBA Governor Michele Bullock said an unemployment rate of 4.5% to 5% could help restrain inflation.

The New Zealand dollar (kiwi) eased 0.2% to $0.5718, having retreated from a one-week top of $0.5749 overnight. Having slid over 4% from its August peak, the technical set-up is still bearish as it struggles to bounce off an 11-week low of $0.5695.

Hawkish comments from Reserve Bank of New Zealand chief Anna Breman have nudged up bets of a third rate hike this year to 3% next month at 75%, but interest rates there are still lower than in many other developed economies.