Don't expect to be crushed underfoot in the rush; while rate cuts were tightly co-ordinated to stem last year's systemic panic, their reversal will be piecemeal and grudging. The decision by the RBA to raise rates by 25bp, while hardly unexpected, underlines the resilience of the Australian economy throughout the credit crisis. I've long favoured the Australian and Canadian dollars as both countries enjoy growing resource wealth per-capita, a well regulated banking system, relatively strong fiscal balances, and substantial exposure to Asia, which has led the global rebound. Both have this week hit new one-year highs against the US dollar, reflecting not only anticipation of a widening yield premium (and yield differentials are now firmly back on the agenda for currency traders, as a period of unsustainably low global interest rates brought about by central bank efforts to offset the impact of the financial crisis starts to slowly reverse) but the huge carry trade now developing in the US currency. It's likely that Canada and Australia will be the fastest growing developed economies in 2010.

Carry trade investors sell the low-yielding US currency to fund purchases of riskier, higher yielding assets such as commodity-linked currencies. The consensus is for further gains in riskier assets and further dollar weakness in the fourth quarter.  The RBA’s bullish stance stands in stark contrast to the Federal Reserve, which is expected to keep US interest rates on hold through most of 2010. Although Israel had already tightened last month, Australia is the first major economy to do so, and candidates for the next move include Norway, Canada and South Korea over the next few months. Norwegian manufacturing production came in at its fastest pace in 16 months in August, support the thesis that the country’s economy has survived the worst of the current slowdown, although downside risk in oil prices this quarter amid a global supply glut may stay the bank's hand. New Zealand and Canada are other candidates for a rate hike, although officials in both countries have suggested that their sustained currency strength will delay any move, as it is proving drag on growth.

Singapore and South Korea are likely to move before Canada and NZ. Singapore's economy posted one of the first technical recessions in Asia due to a plunge in net exports, but in turn its recovery has been quite brisk and without any price pressures. While the temptation to let the economy feed off of cheap credit is very strong, the authorities now have some incentive to restrain ultra- loose monetary policy and start the long process of normalizing interest rates. My own favourite is South Korea, which just a year ago had to reassure foreign investors it was not sliding into the financial abyss. The economy did go through a year long slowdown led by slumping exports, but in fact did not experience a technical recession and like rebounded strongly from Q2 this year, helped by local stimulus measures and Chinese import demand The Bank of Korea is probably confident enough to hike in line with the regional recovery. Overall, my view remains that while the medium-term outlook for the US dollar remains weak, it has become technically very oversold, and is likely to rally sharply sooner rather than later, particularly against the Yen and Euro where widening yield differentials are unlikely to be a supportive factor. As the market has discovered with the Yen many times over the last decade, carry currencies are prone to snapback rallies when least expected.