Traders clearly took Stevens at his word: a Credit Suisse gauge of priced-in rate hike expectations has steadily shown that investors are fully convinced that another 25 basis points will be tacked on to borrowing costs on November 2nd and probably in the months to come as well. In fact, expectations of an increase have been unwavering even as the annual inflation rate declined to the lowest in a decade and producer prices fell at the fastest pace on record, hinting that little upward pressure in the pipeline. To that effect, the risks to the Australian Dollar seem stacked on the downside considering there is little that the RBA’s hawks can say at this point that has not been priced into the exchange rate, with the announcement having significant market-moving potential only in the unlikely event that policymakers backtrack on their aggressive posture.
Looking beyond the rate decision, the trend in risk sentiment is likely to hold sway as the dominant catalyst for price action. After two consecutive quarters of a breakneck bullish momentum across the spectrum of risky assets (stocks, commodities, high-yielding currencies), investors seem to have turned sheepish: the MSCI World Stock Index declined for the first time since June, registering the biggest loss in eight months in October; meanwhile, the VIX index of US stock options volatility that is often seen as a proxy for investors’ risk aversion jumped 23.9% on Friday, the largest one-day spike in a year. If proves to preface a substantial shift away from risky assets, the Australian Dollar will face tremendous selling pressure. Indeed, a trade-weighted index of the antipodean currency’s average value against top counterparts is now 91.8% correlated with the aforementioned MSCI global stock benchmark.
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