Risk Needed To Fuel Aussie Take Off. By Nicholas Hastings

The ingredients for another Aussie rally are all there.

Australian growth remains robust and Australian interest rates will more than likely be hiked again soon.

However, much of the Aussie's fortunes will now depend on the mood of the international investment community.

For the moment, risk sentiment remains fairly strong and the Aussie remains in favor.

See the Australian dollar's recent rise against the U.S. dollar:

This could all change later this week, though, if investors start to worry about another round of quantitative easing in the U.S. or feel that the results of the stress tests on European banks that will be released on Friday just aren't credible.

In the meantime, support for the Australian currency should be growing.

This week's minutes from the Reserve Bank showed confidence in the economy and hinted that interest rates could be hiked again as early as August even though the RBA passed up the chance of raising them when it met earlier this month.

The country's leading index of economic activity also rose 0.4 basis points in May, even if annualized growth in the index eased back slightly from April.

Expectations of a rate rise are only likely to grow if second quarter producer price and consumer price data due next week show the upward pressures that are expected. The RBA's latest Inflation Report on July 28 could also drive this point home.

This outlook for continued Australian growth and even an upturn in inflation has to be taken in the context of slower global growth and the possibility that any tightening in either U.S. or euro-zone monetary policy is likely to be postponed.

If anything, the weakness in recent U.S. and global data suggests that further easing may be necessary. If so, Australian yields will only appear even more attractive as yield spreads widen in its favor.

However, investor appetite for those yields, which have been helping the Aussie to rise this week, could fade, especially if the international investment community loses its nerve.

Fears of a double dip recession, that will probably dampen Australia's growth prospects as well, are a key problem.

But, publication of the European bank stress tests also pose a risk, especially if they fail to reassure financial markets that these banks will be able to withstand the slowdown that is coming.

If that is the case, the global investment community will probably clam up again. Instead of chasing the higher yields being offered by currencies such as the Aussie, they will retreat to safe havens and leave the Australian currency floundering.

Early Thursday in Europe, a decline in risk sentiment hit the Aussie, which fell to $0.8773 by 0645 GMT from $0.8783 late Wednesday in New York, according to EBS.

The 'risk off' mood prevailed after Federal Reserve Chairman Ben Bernanke gave a dovish assessment of the U.S. economy as expected but didn't provide any reassurance of an imminent move to ease policy further.

Despite strong earnings results from companies such as Ebay, most stock markets headed lower and high risk currencies found themselves under pressure.

The euro was virtually unchanged at $1.2764 from $1.2763 but fell to Y110.44 from Y111.09. The dollar fell to Y86.51 from Y87.01, prompting a warning from Japan's deputy finance minister Motohisa Ikeda that the government wants to head off excessive yen strength.

Bloomberg TNI FRX POV

   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074 

(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)