The probability the Reserve Bank of Australia raises interest rates in November this year is "somewhere in the 40s and rising" according to Goldman Sachs, which forecasts New Zealand rates to rise at the same time.
Tim Toohey, who is Goldman's economist in Australia, has three rate rises pencilled in for the RBA in 2018 but sees an increasing chance the RBA moves sooner.
On Thursday, it was revealed that a spectacular surge in coal and iron ore prices has delivered Australia its biggest trade surplus on record. The surplus widened in December to $3.51 billion from $2.04 billion in November, the Australian Bureau of Statistics said. Economists had forecast a surplus of $2 billion, according to Bloomberg.
It's not the first time he has floated the possibility the RBA has finished its easing cycle. In November, Mr Toohey upgraded his GDP growth forecasts for the coming four years by as much as 0.5 percentage points and said there was a growing chance the Reserve Bank would start lifting interest rates in the second half of 2017, which should all support the currency.
"You've got to wonder why people are still looking for multiple rate cuts," he said on Thursday, citing financial conditions in Australia which he described as "an environment we think is actually the most expansionary for a considerable period".
"We will need to see some pick up on the consumer side but from the business conditions perspective, we're in the ballpark already," he said of the state of sentiment.
Wages improving
The weakness in employment he argued was concentrated in the retail sector. But measures of wages were improving, pointing to enterprise bargaining agreements where there is "a little bit of a pickup" in average hourly earnings and "you're getting stabilisation in these things three quarters earlier than we would have anticipated".
"Do we think the incremental improvement in data builds you away from a rate-hiking case or adds to the case of easing? We think the skew is going to be towards the hiking case," Mr Toohey said. The weather pattern recorded in 2016 was a contributing factor behind the underperformance of the retail sector, he adds.
Beyond the improvement in the terms of trade, Australia is about to see "probably the second-highest grain crop on record about to be harvested", equivalent to "another third of a per cent" of gross domestic product, Goldman estimates.
Still, traders are more inclined to think the RBA will cut rates before it returns to a hiking cycle. Futures indicate the implied cash rate in May 2017 is 1.46 per cent, or a 16 per cent chance of a rate cut at that meeting. And most economists are convinced that Australian rates will test record lows this year.
With regards to the RBNZ, Mr Toohey thinks the central bank erred with the extent of its easing. "We're of the view that the only reason they cut was they had such long-dated forward guidance they couldn't walk back from it," he said. He anticipates a more positive fiscal situation in New Zealand and a rate hike coming in the fourth-quarter, if not sooner.
"There is a case that the RBA goes simultaneous with NZ," the economist said, emphasising the election on the NZ calendar this year.