Data released on Friday showed September U.S. jobs growth of 110,000, the highest since May, with numbers for August and July also revised upwards. That sent U.S. stocks to record peaks during the session, but the U.S. dollar could not hold on to its rally ahead of the long holiday weekend.
"A better U.S. economy means calmer markets, so carry trade's are back, and also higher commodity prices," said Matthew Johnson, senior economist at ICAP. "I also think a better U.S. outlook will see our market factor in at least one rate hike (in Australia) in the fourth-quarter, and maybe another in the first-quarter."
In the morning Asian session Monday, the Australian dollar was quoted at $0.9011/9016 against the U.S. currency, up from $0.8873/78 late here on Friday and just off a 23-year high of $0.9023 struck earlier in the session.
Increased demand for carry trades, where investors borrow in the low yielding yen to buy higher-yielding currencies like the Australian and New Zealand dollars, saw the Aussie rise to 105.46 against the yen, its highest since July 26.
The Aussie has risen over 8% against the U.S. currency since the U.S. Federal Reserve cut rates last month, which helped restore confidence in financial markets and saw investors bet
yield differentials between Aussie and U.S. assets would increase on divergent views about official rates.
Australia's central bank maintains a tightening bias amid rising price pressures in the economy. This week, domestic employment figures for September are due and analysts are looking at 20,000 new jobs being added, after 31,900 new positions were created in August.
The jobless rate is expected to stay near a three-decade low of 4.3%.
On Monday, the markets will look to the private sector ANZ jobs report for September for some early direction. So far, domestic data has been on the stronger side, underpinning views that the country has weathered the global credit crunch without much damage to the economy.
As a result, investors are expecting the central bank to lift rates as early as next month. Financial markets are pricing in around a 40% chance of a quarter-percentage rate rise in
Australian bond futures were weaker as investors preferred riskier assets with speculation Aussie benchmark rates might have to rise to restrain inflation only adding to their woes.
U.S. Treasuries also gave a negative lead, plunging after the strong jobs data suggested the Fed may not need to cut interest rates later this month.
The 10-year contract was down 0.07 points at 93.77, while three-year Australian bond futures were down 0.065 points to 93.445, having earlier hit 93.43 -- their lowest since May 2000.