High commodity prices and positive economic reports for the US and China propelled the bourse from the start of trade today.
The benchmark S&P/ASX 200 index climbed 46.1 points, or 1.01 per cent, to 4625.3, while the broader All Ordinaries index rose 43.7 points, or 0.94 per cent, to 4678.4.
At 0500 GMT, the Australian dollar was at US96.96 cents, from US96.60c on Friday. It traded at a fresh 26-month high of US97.70c in New York. Against the Japanese yen, the Australian dollar was at Y81.08, from Y80.59.
In equities, many NSW investors took advantage of a long weekend, but the market made the most of thin trading volumes.
Gains were broad-based, with all sectors pushing higher day and 69 per cent of companies finishing in positive territory.
“The local market posted solid gains today, helped by positive leads from the US over the weekend,” Australian Stock Report head of research Geoff Saffer said.
“Banking was the strongest sector, while miners were also strong, with base metal prices closing strongly on Friday.
“The rest of the market saw a general bullish mood following positive US consumer data on Friday.”
Of the major miners, BHP Billiton gained 54c (1.37 per cent) to $40 and Rio Tinto added 78c to $78.08.
All four major banks closed higher, led by Commonwealth Bank, which added 64c to $51.54. National Australia Bank gained 45c to $25.45, Westpac rose 39c to $23.32 and ANZ added 17c at $23.68.
The Australian dollar strengthened in thin Asia trade as traders awaited tomorrow’s central bank meeting, when the Reserve Bank of Australia is expected to tighten policy for the first time since May.
Economists have overwhelmingly forecast the RBA will hike its overnight target by 25 basis points to 4.75 per cent, citing a desire to keep a lid on inflation and strike first before a mining boom-driven economy beings to overheat.
If the RBA does lift its rates, the move is expected to be positive for the Australian dollar and possibly push the unit through the all important resistance level of US98.50c, the post-float high traded in July 2008.
“Barring a scenario in which the RBA does not raise the rate and sounds dovish, a combination we do not expect, a rate hike would be a substantial boost for the Australian dollar,” Barclays Capital strategists said.
“The RBA would not begin raising rates again after being on hold for four months to fine-tune policy. So, the bills market would likely quickly move to price in a second rate hike this year, which is currently priced at only about a 20 per cent chance,” they wrote.
If the RBA doesn't tighten, the local unit could suffer, RBC senior strategist Sue Trinh said.
“With around 35 basis points of hikes priced by year end, the risk is for a steady rate decision and/or a balanced statement accompanying a hike, which may serve to cool the Australian dollar's heel ahead of the post-float highs of US98.50c,” she said.
In a Dow Jones Newswires poll of 25 economists, 19 expect a rate hike while interbank futures are 60 per cent priced for a lift to the interest rate tomorrow.
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