[cppene]

The Reserve Bank of Australia (RBA) hiked interest rates on Tuesday, saying that current conditions no longer justify the “emergency setting” in place since the beginning of this year. While we continue to see considerable downside risks to the Australian economy going forward, ranging from worsening trade terms to fading fiscal stimulus, the RBA decision clearly signals that the central bank is moving its policy setting back to what it considers the cyclical norm.

Market expects the central bank to raise interest rates to 4.5% by mid-2010. The Australian Dollar (AUD) rallied on Tuesday on the back of the interest rate hike. Further Australian rate hikes in coming months are likely to boost the AUD. Interest-rate differentials between Australia and G7 economies should boost the AUD. Short-term momentum indicators are bullish, with near-term psychological resistance coming in at 0.90.