Nervous investors hang on US Federal Reserve decision
Financial markets have been on a roller-coaster ride for the past few weeks amid growing speculation of a wind-down of the US's bond-buying program, which has flooded markets with large amounts of 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 Index closed 34.1 points higher at 4825.9. The All Ordinaries Index ended the day 29.5 points up at 4805.
The S&P/ASX 200 Index volatility index has risen 40 per cent since the peak of the sharemarket on May 14.
The Australian dollar has also had a bumpy ride, rising above US96¢ on Monday after falling to a 32-month-low of US93.25¢ last week. It was trading at US96.24¢ late on 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 up US dollar and US Treasury yields and see the Australian currency slip 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 senior trader Luke McElwaine said.
Conversely, if Dr Bernanke's remarks suggested the stimulus withdrawal could proceed more slowly than markets expect, support for the US dollar and the 10-year treasuries could weaken, pushing the local dollar higher, Mr Redican said.
The last time Dr Bernanke spoke, on May 22, financial markets entered a period of volatility. He had appeared to go harder on a possible slowing of stimulus than in his statement to the US Congress joint economic committee.
The impact on Australia of the Federal Reserve's money printing 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," Mr Kennedy said.
At the same time NAB currency strategist Ray Attrill said that despite downward pressure on the dollar, the statement from the Federal Reserve meeting was not expected to be sufficiently strongly worded to "send the US dollar to the stratosphere" against its peers.
Mr Kennedy expected Dr Bernanke to clarify that a tapering of the stimulus programs would not mean a tightening of monetary policy.
"That's something that would settle markets a little bit and reinforce the story that there's still a long way to go in the US," he said.
"[It'll show] that the Fed's going to remain with a more accommodative monetary policy stance for some time yet, and that maybe things have got a little bit ahead of where they should be."
Frequently Asked Questions about this Article…
Investors are wary because the Fed meeting is expected to shed light on a possible pull-back of its asset‑buying (quantitative easing) program. Any hint of tapering can change global liquidity, push up the US dollar and US Treasury yields, and trigger volatility in Australian stocks and the currency.
The Australian market has been volatile. On Monday the S&P/ASX 200 started deep in the red then reversed to close 34.1 points higher at 4825.9, while the All Ordinaries ended 29.5 points up at 4805. The S&P/ASX 200 volatility index has also risen about 40% since the peak on May 14.
A 40% rise in the volatility index indicates bigger and more frequent swings in share prices. For everyday investors that typically means a higher chance of rapid intraday moves in portfolios and a greater need to be aware of risk tolerance and time horizons when markets are unsettled.
If Bernanke signals the Fed may start tapering this year, that could lift the US dollar and US Treasury yields and push the AUD lower. Conversely, if he suggests tapering will be slower than expected, the US dollar and 10‑year Treasuries could weaken, which would likely push the AUD higher. The article notes the AUD traded around US96.24¢ late on Monday, after a recent low of US93.25¢.
Yes. The article quotes RBS Morgans senior trader Luke McElwaine saying a fall in the AUD could encourage foreign investors to return to the local sharemarket after exiting when the currency began sliding.
When Bernanke spoke on May 22, markets entered a period of volatility because he appeared to signal a tougher stance on slowing stimulus than in his earlier congressional remarks. That comment sequence helped trigger recent market swings.
Not necessarily. JPMorgan economist Tom Kennedy said he expected Bernanke to clarify that tapering asset purchases would not equal an immediate tightening of monetary policy, and that the Fed was likely to remain accommodative for some time.
Pay attention to the tone of Bernanke's remarks on tapering, movements in the US dollar and 10‑year Treasury yields, intraday swings in the S&P/ASX 200 and its volatility index, and changes in the AUD exchange rate — all of which the article highlights as key channels through which the Fed decision could affect Australian investors.
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