Financial markets are becoming more confident that US politicians will secure a deal to avoid a US government debt default that could threaten the world economy.
US Senate leaders in Washington were reportedly close on Monday to an agreement to raise their country’s $US16.7 trillion ($A17.64 trillion) borrowing limit before the October 17 deadline.
There have been repeated disappointments during a political standoff that has left the US government in partial shutdown for two weeks, but Australian Treasurer Joe Hockey remains fairly confident that a deal will be done.
Mr Hockey, who is still in the US following last week’s Group of 20 finance ministers’ meeting, told CNBC television that a default was “almost inconceivable”.
“The world needs America and America needs the world,” he said.
“I think it is that second part that has been lost to some in Congress.”
He said the Australian government has contingency plans in place should the US suffer a “heart attack”.
“Certainly we have back pocket plans to deal with whatever arises over the next few weeks as a result of negotiations,” he said.
The Reserve Bank of Australia’s (RBA) October 1 board meeting minutes released on Tuesday showed it had concerns over the uncertain US budget environment.
The central bank left open the option of further cutting the cash rate, which already sits at an all-time low of 2.5 per cent.
It said there had been two developments over the past month: the appreciation of the exchange rate and the pick up in measures of both consumer and business confidence.
“It was difficult to know how significant the effects of either of these developments would be, partly because it was uncertain whether they would be sustained,” the minutes said.
It noted the Australian dollar had appreciated significantly against the US dollar when the US Federal Reserve refrained from an expected tightening in monetary policy, but said the currency was still about 10 per cent lower than a peak in April.
The currency struck a four-month high of 95.35 US cents on Tuesday, more than a cent higher than at the time of the board meeting.
The minutes said recent data confirmed that overall Australia growth had been below trend.
Even so, the board believes the effect of low interest rates was evident across a range of indicators and had further to run, noting increased house prices and signs of a coming pick up in dwelling investment.
RBC Capital Markets head of strategy Su-Lin Ong pushed back the timing of an expected rate cut from December to the June quarter 2014.
“The cash rate is likely to remain at an historical low throughout 2014 – and possibly longer – regardless of whether the RBA delivers one final cut or not,” she said in a note to clients.