Take Off Time For The Aussie. By Nicholas Hastings

Chocks away!

The Aussie is about to head higher again.

Reserve Bank of Australia Governor Glenn Stevens cleared the way for take off with his speech on Tuesday in which he removed two of the key obstacles to an even more pronounced rally in the Australian currency.

He not only failed to express any official concern about the Aussie's rally, which has taken it over 30% since late February, but he explicitly suggested that rates could head higher without unemployment starting to fall.

Until now, the assumption that the Australian authorities were keen to keep the currency competitive has helped to constrain the more bullish of the investment community.

Like most other countries, Australia, which relies so heavily on commodities, was expected to try to export its way out of recession.

However, one of the key notes of Stevens' speech was his suggestion that Australia has pretty much achieved this already -and will be the first G10 economy to bounce out of recession.

This optimism has essentially erased the last expectations that the RBA may still have to cut rates some more.

On the contrary, analysts are now starting to speculate on when the first rate hike will come following Stevens' admission that there is "no rule that (the RBA) could wait for unemployment to peak before raising rates..."

Although the market could well wait for next week's minutes from the RBA for confirmation that the bias has now changed from a rate cut to a rate hike, this hasn't stopped the 30-day cash rate futures pricing in a 15 basis point hike in rates by December.

This widening in rate differentials could help to push the Aussie higher especially against the New Zealand dollar, where expectations of another rate cut remain strong.

But the Aussie is still likely to make gains on most other major crosses as well.

As Stevens pointed out in his speech, the outlook for the global economy has also brightened, ensuring that commodity prices -including those of crude oil and gold -continue higher, backing the trend that is benefiting the Australian economy.

Stuart Bennett, senior foreign exchange strategist at Calyon Credit Agricole in London, is already looking for the Aussie to rise back to its September 2008 high of $0.85.


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However, there is one possible fly in the ointment -fear that easy policy is creating an asset bubble in China instead of boosting the real economy.

If the People's Bank of China tightens policy again, this will hit equities and remove some of the optimism that has been feeding through to the Aussie.

"We should not ignore the impact Chinese domestic policy will have," the currency strategy team at BNP Paribas warned.

Concern over policy was already evident in a sharp 7.4% fall in the Shanghai Composite Index earlier Wednesday.

The Aussie itself also slipped a little as global risk appetite appeared to have been knocked by a decline in U.S. consumer confidence and an overall reassessment of recent optimism in the global economy.

By 0630 GMT, the Aussie was down at $0.8193 from $0.8270 late on Tuesday in New York, according to EBS.

The dollar is down at Y94.19 from Y94.55 with the downturn in sentiment reflected in a fall in crude oil prices with futures on the New York Mercantile Exchange tumbling $1.35 from New York's close to $65.88 a barrel.

The mood wasn't helped by news that take-up by foreign central banks in Tuesday's two-year Treasury auction was only 33%, a far cry from the 69% achieved in June.

The euro fell to $1.4142 from $1.4172 and to Y133.09 from Y133.99.