httpvh://www.youtube.com/watch?v=POD8BRejLFY

• Interest rate hike whips Aussie higher.
• Wednesday is FOMC day.
• US Midterms.

The decision to hike interest rates yesterday came as a shock to most and the Australian dollar was quick to capitalise from the tightening of monetary policy settings. By the time Americain had one the Melbourne Cup, the AUD had rallied a cent against the USD in 30 minutes and left the local unit in a good position when overseas markets opened. When Europe and the US opened, the Aussie rallied further, this time above parity. The Australian data this week has been strong in key areas, namely HIA New Home Sales (0.6%), TD Securities Inflation (3.8%) and AiG Performance of Services Index (50.7). The reserve bank cited growth in China as the key reason to contain inflation by raising rates (4.75%) and noted that “concerns about the possibility of a larger than expected slowing in Chinese growth have lessened” while also saying that “the economy is now subject to a large expansionary shock”. This saw mortgage rates pushed higher however may be a move to spare consumer confidence in December.

We’ve been waiting for this announcement for weeks and this evening (Wednesday), we’ve got the FOMC meeting in the US. Should an announcement of Quantitative Easing (QEII) of US500b or more be forthcoming we should have a higher trading range quickly established for the AUDUSD. The data this week from the US has again reflected a recovering yet vulnerable economy with a range of data releases offering mixed results. Importantly, Initial Jobless Claims (434K) and Continuing Jobless Claims (4356) were less than expected, Construction Spending (0.5%) and ISM Manufacturing (56.9) were higher than expected however ABC/Washington Post Consumer Confidence (-46) remained low. The data highlights the need for more monetary stimulus through QE however the size of the purchase of securities is widely speculated on. QE has the objective of spurring the economy higher by reducing the cost of debt to consumers and companies, however runs the risk of higher inflation with little improvement to the guts of the economy namely Unemployment (9.6%).

Mid-term elections in the US are proving a headache for the Obama administration as its mandate for reform has weakened. The outcome of the elections will be a majority held by the Republicans in the House of Representatives, while the Senate majority held by the Democrats will be significantly reduced. The impact this will have on currency markets is yet to be known however it’s likely any new ‘Teaparty’ members of Congress will be aiming to undermine a lot of the Obama administration’s financial system reform and some measures that promote growth.

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