A speech by RBA Governor Glenn Stevens set the tone for what may be an aggressive wave of monetary policy tightening. Stevens discusses monetary stimulus in light of the global financial crisis, emphasizing that Australia seems to have weathered the broader economic crisis and escaped relatively unharmed. Economic resilience suggests that previously aggressive interest rate cuts have done their job, and in fact the central bank has already begun reversing its monetary policy accommodation. In its recent rate hike the RBA stated that rate hikes should “gradually” be pulled back.
Yet Stevens surprised many when he effectively foreshadowed rate hikes with similar intensity to the large cuts we saw through the financial crisis. He clarifies that he does not believe that the Australian economy is currently “too strong”, but he does go on to say “that the very low interest rate settings were designed for a weaker economy than we are in fact facing.” Interest rate expectations jumped on the commentary, and in fact markets are now pricing in a 50 percent chance of an aggressive 50 basis point (0.50 percent) rate increase through the November meeting.
Expectations are running high for Australian Dollar yields and the currency itself. The key question in the weeks and months ahead will be whether reality can match those lofty expectations. As it stands, a number of respected research desks have called for Australian Dollar parity against the US Dollar in the coming months. Yet near record-high Aussie correlations to key commodity prices suggest that AUD forecasts may depend on broader moves in key financial asset classes. Suffice it to say, there should be no shortage of excitement in upcoming Australian Dollar trade. – DR
DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.
