Market buoyant as US maintains course
The sharemarket closed higher for the week, with the dollar hitting a three-month high, after the US Federal Reserve said it would not slow the rate at which it was printing money.
The announcement, which means the Fed will stick with its monthly $US85 billion ($90 billion) quantitative easing program for now, saw Australian stocks hit a yearly high on Thursday.
It also caused Australia's dollar to leap above US95¢, making life suddenly harder for the Reserve Bank, which has been trying to keep the dollar down.
For the week, the benchmark S&P/ASX 200 Index gained 57.1 points, at 1.1 per cent, at 5276.7 points, while the broader All Ordinaries rose 56.1 points, or 1.1 per cent, at 5270.8 points.
The week's main event occurred in the US, where monetary authorities said they would not yet take steps to slow the rate at which they were buying bonds.
Instead, they had decided to wait for more evidence that economic progress would be sustained before adjusting the pace of bond purchases. Global currency and stocks markets spiked on the news.
But Westpac's senior currency strategist, Sean Callow, wondered why markets were so shocked.
"It couldn't really be that the US economy was so self-evidently strong that reduced stimulus was the obvious choice," he said. "Instead the surprise stems from Fed communications."
Mr Callow said market expectations for a reduction in the US quantitative easing program had been sparked by Fed chairman Ben Bernanke's testimony to Congress in May.
Then those expectations only solidified at a Fed press conference in June, where Mr Bernanke indicated that bond purchases were likely to be reduced "later" in 2013 and then concluded by mid-2014, if the Fed's forecasts panned out roughly as expected.
So this week, when Fed authorities did nothing to ease its bond buying program, market participants were scratching their heads.
"Shocking the markets is the sort of step we might expect from a Princeton academic such as Ben Bernanke used to be," Mr Callow said.
"But of course as Fed chairman, Mr Bernanke has been eager to increase transparency compared to the obfuscation of the Greenspan era. We will hear plenty from Fed speakers over the next week, but their comments will be received with great caution."
At any rate, economists said the Fed's decision had to do with four main reasons: US inflation was still low, financial conditions remained tight, its economic data was mixed, and the country faced some near-term fiscal policy risks.
Economists also said the earliest the US Fed might moderate the pace of its QE purchases would be in December.
This has created an immediate headache for the RBA, because currency strategists say the dollar could find a new short-term resting place around US98¢.
That's not a good thing for the RBA, as it wants the currency to weaken to support the Australian economy as it rebalances away from mining-led growth.
For the week, Qantas rose 5¢, or 3.5 per cent, at $1.50. Leighton Holdings fell $1.09, or 5.5 per cent, at $18.78, after John Holland won a $257 million contract for work on a rail project linking to Gina Rinehart's Roy Hill project.
ASX gained 48¢, or 1.4 per cent, at $35.33, as two board directors resigned in the wake of a share trading scandal in the US.
Westfield rose 16¢, or 1.5 per cent, at $11. It said it was selling seven US malls for $US1.64 billion.