Dovish Yellen to drive the Aussie dollar

The currency headache for policymakers will continue to pound until Janet Yellen's expected appointment in January. Even then her support for easy monetary policy may not improve things for the Aussie.

Once again it looks like the Aussie dollar will be at the mercy of the US Federal Reserve, the most influential central bank as it continues to wield the power over the currency market.

Janet Yellen’s nomination to be the next chair of the Fed was celebrated by markets on the expectation she will offer continuity – embracing the ultra-easy monetary policy undertaken by current chairman Ben Bernanke.

With a change at the helm of the Fed due in January, tapering might by iced until Yellen takes control, offering no reprieve for the those seeking a softer Aussie dollar until then at the earliest.

You can only imagine Glenn Stevens and fellow Reserve Bank of Australia (RBA) board members scratching their heads as it looks increasingly unlikely the Aussie dollar will lose steam anytime soon.

As the RBA seeks a lower exchange rate, which it can’t explicitly put a number on, policymakers are running out of options other than to slash interest rates further to lower the currency. Persisting with the current bond-buying program, which it is assumed Yellen will do, only weighs on the US dollar.

Minutes from the September Federal Open Markets Committee (FOMC) meeting concluded the majority of members expected tapering by year end, which temporarily strengthened the US dollar against major trading partners in trade overnight. However, once the debt ceiling drama is overcome, we can expect currency markets to be more cautious and wait for a formal announcement from the Fed concerning tapering before making any big moves.

It was not so long ago we were talking about Bernanke having the Aussie dollar on a string (Bernanke has the AUD on a yo-yo, September 19). The reality is whoever is in control of the Fed has the muscle to dictate the exchange rate.    

Famed economist Nouriel Roubini, who tipped the US housing collapse, explained in a July note to clients that one of Yellen’s weaknesses was her ‘lack of financial market experience and concern about financial stability relative to economic growth'. Yellen was Roubini’s boss in the late 1990s, giving him intimate knowledge of how she thinks.  

While admittedly few economists anticipated the global financial crisis, in July of 2007 Yellen declared “I do not consider it very likely that developments relating to subprime mortgages will have a big effect on overall U.S. economic performance”. 

Yellen is lauded as a dove, which is favourable to equity markets for the time being. Despite this, there is still room for equity and currency markets alike to be stunned by her decisions, with tapering at her discretion.