Australia's treasurer has warned that a "huge tsunami" will engulf global financial markets when China bows to international pressure and floats its currency.
"That will be a wild ride when that happens," Peter Costello told the Sydney Morning Herald in an interview published yesterday. "That will set off a huge tsunami that will go through world financial markets."
Costello has been treasurer for the past 11 years, presiding over an economic boom in Australia driven by China's hunger for resources and is heir-apparent to Prime Minister John Howard.
Expanding on his dire prediction in a radio interview yesterday, Costello said China should float its currency but warned of major volatility when that happens.
"The day they decide to float their currency you are going to get huge reversals of financial flows around the globe, which will affect all exchange rates, that's why I compared it to a tsunami," he said.
Costello denied that his warning was aimed at persuading Australia's central bank not to raise interest rates at its board meeting on Nov. 6, just weeks before general elections.
Meanwhile, the Australian dollar traded yesterday at its highest level against the US currency since it was floated 23 years ago, boosted by speculation interest rates would be hiked early next month. At 4:45pm the Australian dollar was at US$0.91, against US$0.89 a week ago.
Robert Rennie, head of Westpac's foreign exchange strategy, said attention appeared to have switched back to fundamentals, including the widening spread between Australian and US benchmark government bonds.
The yield spread between Australian and US two-year government bonds reached 2.9 percentage points this week -- the widest since May 2004.
"We're starting to move away from slavishly watching what US equities are doing and are likely to do and more toward the fundamentals," he said.
Rennie said Wednesday's release of third-quarter consumer price data had been a catalyst for the shift in focus. The data showed Australia's underlying inflation was at the top end of the 2 percent to 3 percent range the Reserve Bank of Australia (RBA) aims in to keep inflation within.
"I think we're we're going to see a significant possibility of the Fed cutting rates by 25 basis points next week to 4.5 percent, while the RBA is likely to raise rates next month and possibly the following month so that takes you to 7 percent," he said.
"That's a 250 basis points differential which has to be good news for the Aussie," he said.
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