A sneak preview of taper trouble to come

In the last 24 hours we have received another sneak preview of what the world will look like when the United States begins to taper quantitative easing or so called money printing.

And the most immediate signal for Australia is that our dollar is being hammered. Last night it fell below 90 US cents and that hammering is only just starting. The Australian dollar has a lot further to fall, unless Chinese investment in property suddenly escalates. Last month when the dollar had just slipped to around 91.5 US cents I alerted Business Spectator readers to what I believed was ahead (it’s always hazardous predicting currencies) and the forces behind the looming fall (Nine reasons the Aussie dollar will fall further, November 22).

Those nine forces are now gathering momentum but timing is always unpredictable. A fall in our dollar below 85 US cents would help what remains of the motor industry but it has to come quickly and that may not happen.

The tapering lifts American interest rates so last night the prospect of tapering caused US bond yields to edge higher. That lifts the US dollar and lowers the Australian dollar. But the fall in the Australian dollar also reflects a series of other events. Our high-cost labour market is already weak with most of the new jobs in part-time work. The decision by the Abbott government to precipitate driving General Motors out of Australia, the end of the mining investment boom and other unemployment boosters mean Australia faces a wall of unemployment, which is likely to cause lower Australian interest rates at a time of rising US interest rates (Australia's five tidal waves of unemployment, December 9).

The prospect of the taper increases nervousness in emerging markets and we saw share markets like Indonesia and India fall yesterday. The Indian Rupee is being hammered. A lot of US quantitative easing money has ended up in emerging markets and with tapering some of it will try to go home.

The world sharemarkets have been big recipients of QE money and, with US rates rising, Wall Street is down again, as are European sharemarkets. But note that the American market has not collapsed. There is great inner strength in the US.

The fall in the dollar boosts our miners but makes overseas investors nervous, so our market falls with global markets.

With a rising US dollar gold is being hit hard.

Remember, tapering has not yet started. What we are seeing is a preview of what is ahead. Nevertheless the ingredients are in place for beginning a US gradual reduction of buying mortgage securities. I think it will happen in the first half of 2014 but timing is always hard to determine because these sneak previews make the Federal Reserve nervous.