Investors in anxious wait for Fed update

Investor anxiety is building in global markets before the US Federal Reserve meeting on Wednesday, which is expected to shed more light on a possible pullback of its asset-buying program.

Financial markets have been on a roller-coaster ride over the past few weeks amid increasing speculation of a wind-down of the US’s bond-buying program, which has flooded markets with liquidity.

The Australian market started deep in the red on Monday, only to jump higher later in the session in another intraday reversal of fortunes. The S&P/ASX 200’s volatility index has risen 40 per cent since the peak of the market on May 14.

The dollar has also had a bumpy ride of late, rising above US96¢ on Monday after falling to a 32-month-low of US93.25¢ last week. It was trading at US96.24¢ late Monday.

If Fed chairman Ben Bernanke suggested the central bank hoped to be in a position to taper its quantitative easing this year, his comments could drive US dollar and US Treasury yields upwards and see the Australian currency slipped lower, Macquarie Bank senior economist Brian Redican said.

A fall in the Australian dollar could also see foreign investors return to the local sharemarket after exiting at the start of the currency’s recent slide, RBS Morgans trader Luke McElwaine said.

Conversely, if Mr Bernanke’s remarks suggested the stimulus withdrawal could proceed slower than markets expect, support for the US dollar and the 10-year Treasuries could weaken, pushing the dollar higher, Mr Redican said.

The last time Mr Bernanke spoke on May 22, financial markets entered a period of volatility after he appeared to go harder on a possible slowing down the stimulus programs than his statement to the US Congress’s Joint Economic Committee.

The Australian impact of the Federal Reserve’s money-printing actions has mostly been felt through the currency, which traded mostly above parity with the US dollar for about two years before its recent slide, JPMorgan economist Tom Kennedy said.

‘‘The currency has fallen quite sharply over the past month or so. Even though the rate cut that was delivered in May did help in lowering the currency, we think it’s been mainly a ‘US dollar strength’ story through indications in the market that the Fed will start to taper their asset purchases,’’ he said.