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• RBA provides hawkish take on local growth prospects.
• US Fed is unmoved by case for launching QE II.
• Japan successful with their currency intervention.

The RBA has been on the front foot and scoring points when it comes to spruiking the local unit over the last week. The central bank and its Governor in particular take a particularly balanced line when it comes to lending their views on the economy and often play a low profile during periods of questionable economic growth. This week has not been one of those occasions with Governor Stevens saying on Monday at a regional forum in Shepparton that “if downside possibilities do not materialise, the task ahead is likely to be one of managing a fairly robust upswing”. It’s been raining heavily in Shepparton and the Governor was there laying the framework for further optimism for the Australian economy. On Tuesday, the September meeting minutes continued this theme by noting that board members are “alert” to the downside risk for the global economy however that “members considered that if the central scenario came to pass it was likely that higher interest rates would be required, at some point”. Apart from hawkish RBA rhetoric, there has largely been a vacuum when it comes to economic data however we saw strong figures from both the Westpac Leading Index (0.4%) and Consumer Inflation Expectation (3.1%).

The Federal Reserve has eschewed from commentary made by respected players in the market that they would announce a more expansive Quantitative Easing strategy. The impact of a larger Fed balance sheet on the US economy is questionable and with the fits and starts of economic recovery emerging there, it is clear that Ben Bernanke is comfortable to maintain the current level of asset purchases. Either way, the rhetoric that emerged from the Fed regarding QE was enough to push the carry trade further into the market while mildly undermining equity markets. Equities put on weight this week regardless, with the S&P500 up 1.65%. The Fed is clearly prepared to put greater upward pressure on inflation which they noted was “somewhat below” the target levels. Given the overnight moves for the AUD, and all things being equal, should the Fed announce a QE mandate similar to the March, 2009 USD 1 trillion purchases of securities, then the AUD will have further growth prospects. Off the back of a suite of positive conditions for the AUD, the currency has this week posted fresh highs since the fall of Lehman Brothers in September 2008.

Japan has been successful in weakening the yen close to 3.5% against the greenback this week, which has seen Asian stock markets rally with the Nikkei 225 up 2.88%. After a failed leadership coup, the Japanese government sold the yen over the past week in an effort to improve earnings for their export led, outward looking economy. After a prolonged period of resisting pressure for intervention, their Finance minister, Yoshihiko Noda, conceded this week that “with deflation, our economy is in a severe situation and it’s undesirable that the strong yen be prolonged”. This unilateral intervention was criticised by governments around the world and may be as effective as blowing in the wind should a substantive US QE II be implemented before year-end. The government was left with no alternative however with the Japanese economy being treated with scant regard by traders seeking a safe haven to store funds during the stock market crash post Lehman Brothers.

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