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.

The Federal Reserve Board (FED) will begin a two day policy meeting Tuesday and announce its policy decision on Wednesday November 4th at 2:15 ET. No change is expected in the current overnight rate of 0.00-0.25%. The trade will be looking at the Fed's policy statement to see if the Fed outlines the details of an exit strategy from quantitative ease or lays the foundation for future rate hikes by changing the language is of its policy statement. Last week the US reported that Q3 GDP rose 3.5%. The rise in the GDP confirms that the US economy posted its first quarter of growth in over a year and is emerging from recession. The rise in the GDP may increase pressure on the Fed to move forward the timeframe to begin its exit strategy from quantitative ease and to set the stage for removing monetary stimulus.  In light of the recent improvement in US economic data including Q3 GDP, the improvement in the housing market and Monday's report of expansion in manufacturing ISM the Fed may choose this week's policy meeting to outline its exit strategy from quantitative ease. The Fed may also change the language in the policy statement and drop the wording from prior policy statements that interest rates would remain low for an extended period. If the extended period language is dropped it would begin to set the stage for future Fed rate hikes. With the US economy losing more than 6 mln jobs since the start of the recession and  jobless claims still above 500k the Fed will likely signal that policy changes will be gradual. Should the Fed drop the extended period language from its statement the USD may get a temporary boost.  Expect the Fed policy statement to confirm that the Fed sees continued improvement in US economy and low inflation. The trade will also be looking to see what the Fed says about continuation of purchase of mortgage-backed securities. In the prior statement the Fed indicated that the purchase of mortgage securities will begin to slow.