The Australian market is up and the dollar down following the Fed’s overnight decision to begin tapering its purchases of bonds each month.
Stocks, bonds and currency markets reacted strongly to the unexpected reduction from $85 billion per month to $75 billion. But one-day moves are really just noise: the real money is made over the longer term.
So what does the decision to taper mean for the Aussie dollar, the ASX and Australian interest rates?
Looking first at the Australian stock market it is clear that there has been some heavy selling of stocks lately with the ANZ showing that international investors have been net sellers of ASX stocks recently.
The ASX is up 66 points today at 5161 but international investors seem to reflect the Goldman Sachs view that Australian markets will continue to underperform the globe.
So the verdict is that the ASX will head up while US stocks recover but it will lag US gains.
Glenn Stevens will have been pleased that the Aussie was knocked down to a low of 88.18 cents and it has not really gained much since then sitting at 88.5 cents presently.
And if the CBA currency team is right then Governor Stevens is going to be very satisfied with the impact of the taper. From currency strategist Peter Dragicevich’s note to clients:
[The USD is now] on a modest multi‑year uptrend. A firmer USD is being supported by a few factors:
- The US economy continues to outperform a majority of the other major G7 economies;
- The US current account deficit has narrowed from more than 6.0% of GDP in 2006 to less than 2.5% of GDP, providing the USD with some support on a valuation basis; and
- The Fed is moving closer to the end of its easing cycle … A firmer USD over 2014 is likely to put downward pressure on most currencies.
By “most currencies”, Dragicevich means the Aussie dollar too, so while the RBA’s 85-cent target might seem a stretch right now, Glenn Stevens might get his wish next year.
On the interest rate front, the FOMC decision won’t impact RBA cash rates nor variable fixed rate loans.
The RBA might be getting more confidant about Australian economic recovery but the market continues to think that rates are going to be on hold until 2015.
So the economy is free to growth with accommodative monetary policy.
All in all, the taper should be helpful for the Australian economy. If the market and RBA Governor Stevens is right, then its via a big Aussie dollar fall that an economic rebalancing will come. If it does, then the ASX should benefit and rates will be higher in 2015.