Despite the geopolitical tension with North Korea and the ongoing effects of hurricane Harvey, risk was back on last week. Global equity markets lifted, bond yields were marginally higher, and the US dollar was strengthening which pushed commodities lower.
With the Reserve Bank’s meeting this Tuesday eagerly awaited for clues on how soon rate increases will be on the table, the Aussie dollar’s recent moves will add to the complications as the RBA board ponders what to say in their accompanying statement. The currency’s 10% rally this year is already acting to restrain the economy, and much of that rally accompanied the turnaround last June as futures markets moved to start pricing in rate hikes instead of rate cuts. The Australian dollar has stalled at around USD0.80 as currency traders price in only one possible rate hike from the RBA in the coming year, but any move to price in more than one could push the Aussie toward the 85 cents. So, watch this Tuesday’s RBA statement accompanying their almost certain “no change” announcement for any hints of a change in view and stance on monetary policy.
And finally, nothing like a hydrogen bomb to get people’s attention. After a risk positive overnight session offshore on Friday night, news on Sunday that North Korea successfully tested a more advanced nuclear weapon has this morning triggered a bid for safe haven assets and will see rate markets rally and sour the mood for equity markets for the start of this week.