- Australian consumer confidence at highest in two years
- Australian Dollar outside day warns of reversal

The Australian dollar was once again a top performer to finish the week’s trade as speculators poured into the progressively higher-yielding Aussie currency. Hawkish rhetoric by Reserve Bank of Australia Governor Glenn Stevens underlined the bank’s resolve to tighten monetary policy sooner than later. Indeed, Overnight Index Swaps are now pricing in an impressive 200+ points of rate hikes in the coming 12 months—by far the most of any G7 central bank. All else remaining equal, this should provide solid Australian Dollar support against lower-yielding counterparts. Yet the pace of Australian Dollar appreciation has been nothing short of impressive, and one has to wonder whether the currency can continue its recent advances. An effectively empty economic calendar gives little in the way of foreseeable event risk in the week ahead, and as such it remains most important to watch for major moves in key asset classes.

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