Special FX Report - RBA policy decision Tuesday, Fed Wednesday

The Reserve Bank of Australia (RBA) will hold a policy meeting on Tuesday, November 3rd. The RBA elected to hike interest rates 25 bps to 3.25% in October. The RBA was the first major industrial nation to hike rates since the emergence of the economic and financial crisis at the end of 2007. The RBA rate hike helped fuel an AUD rally to a 14 month high. Monday, the Australian government upgraded its economic and fiscal forecasts and expects Australian GDP at 1.5% in 2009/10 and 2.75% in 2011 with inflation at 2.25%.The upgrade of Australia's growth and inflation outlook coupled with today's report of a 4.2% rise in Australia's Q3 house price index increases the odds of a RBA rate hike. The government upgrades help to offset last week's Australian economic data which confirmed that Australia's inflation remains weak and the recovery may be at risk. Last week Australia reported that Q3 inflation declined to its lowest level in a decade, PPI posted a record decline, leading indicators declined along with a drop in new home sales. The Australian inflation data has some analysts pairing back forecasts of aggressive RBA policy action but general market consensus is that the RBA will hike rates 25 bps at Tuesday's policy meeting and hike rates again in December. Recent statements from RBA officials indicate that yields cannot remain at emergency low levels.  RBA Governor Stevens said that now is the time to begin reducing monetary policy stimulus. Analysts at Westpac Monday issued a forecast that the RBA will hike rates by 50 bps Tuesday. RBA watcher McCrann sees less of a chance 50 bps rate hike from the RBA if inflation remains in check. Australia's CPI report suggests that RBA rate hikes may less aggressive. A 25 bps rate hike from the RBA should already be discounted by the current AUD rally. A 50 bps rate hike would be a mild surprise and may encourage further AUD gains. AUD has experienced choppy price action over the last few trading sessions with the price moves dovetailing the direction of global equity markets and risk sentiment. AUD price action will likely continue to follow equities and risk appetite with the impact of the RBA policy decision short lived.