An outlook for higher interest rates from the U.S. Federal Reserve would come as a welcome relief to the RBA if it helps to keep the Aussie dollar down. The strength of the Aussie dollar over the last couple of years has been a dull ache in the neck of the RBA given the headwind it creates to ‘rebalancing’ the economy.
A more hawkish than expected Fed should also see bond yields rise, a very hawkish Fed may see that psychological 3% yield on U.S. Treasuries being breached in the near term. But the magnitude of the rise in yields will not be as great in the Australian bond market given the lower inflation profile, an economy that’s not living up to potential and the hard data is not following the soft.  
The bond market will be a driving force for volatility in both local and global equities. But higher yields and tighter rates are a response to an improving economy and they are not at a level which is punitive for corporate borrowing costs. Moreover, as revenues rise, profit margins can be maintained or increased depending on the market. However this is more likely a case for global rather than domestic (Australian) equities.
By Kerry Craig, Global Market Strategist, J.P. Morgan Asset Management