Australian dollar set for best week since April as bullish case builds

The Aussie also scaled a seven-month high on the Japanese yen on Friday, and hit a three-month top on the euro and a 10-month peak on the Canadian dollar.

Analysts said the Aussie also benefited from record-high stock prices, positive yield differentials as the Reserve Bank of Australia is set to go slowly on its easing cycle, higher commodity prices as well as the country's political stability and relatively sound debt position.

"Given the movements in AUD cross rates, it’s fair to say this is more than just tailwinds from risk markets and AUD’s use as a risk proxy in G10 FX," said Chris Weston, head of research at Pepperstone.

"Our client flows on AUD pairs have increased of late, with a mix of tactical traders aligned to the relative attractiveness of the AUD, momentum traders staying long on the absolute outperformance."

Against the U.S. dollar, the Aussie was at a 10-month top of $0.6665 on Friday, having climbed 0.7% overnight to break key chart resistance at $0.6625. That provided technical momentum for further gains, with bulls eyeing the $0.6687 top from November.

For the week, it is up 1.6%, among the best performing G10 currencies.

Overnight, a broadly in-line reading on U.S. consumer prices and a jump in weekly jobless claims added to wagers that Federal Reserve will cut rates two more times after next week's sure move of a quarter-point rate cut.

Markets, in contrast, see little chance the RBA will ease at its meeting this month following a run of solid domestic data. The probability of a quarter-point rate cut to 3.35% in November has been pared back to 76%, from 100% a couple of weeks ago. 

That is partly why Australian bonds have lagged the rally, widening the spread over 10-year U.S. yields to around 18 basis points (bps) from -20 bps in mid-June.

The kiwi dollar was less fortunate in reclaiming its multi-month peaks, undermined by still weak economic data and its dovish central bank. It was last steady at $0.5975, having gained 0.6% overnight. For the week, it is up 1.3%.

All eyes are on New Zealand's GDP figures next Wednesday, which are likely to show the economy shrank by about 0.3% in the June quarter. Any unexpected weakness could spur bets of a large 50 bps cut from the Reserve Bank of New Zealand, which has already signalled two more 25 bps moves this year.

Data on Friday showed retail spending in the country rose 0.7% in August, the third straight monthly increase.

"This improving trend bodes well for September quarter GDP, especially after what we expect will be a disappointing June quarter print next week," said Darren Gibbs, senior economist at Westpac.