Fed scales back bond-buying program
Federal Reserve chairman Ben Bernanke defends decision to cut aggressive bond-buying program as economy continues making progress.PT1M23S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-2zm0h 620 349 December 19, 2013
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The Australian dollar has gradually weakened today, after a period of volatile trade that saw it briefly fell to its lowest levels in more than three years as the US Federal Reserve started a wind-back of its unprecedented stimulus program.
The local dollar fell to as low as US88.19¢just before the Fed’s announcement this morning, before jumping more than a cent to US89.45¢.
Catalyst: Chairman of the US Federal Reserve, Ben Bernanke. Photo: Bloomberg
It struggled to retained its strength as the day progressed, and weakened to US89.23¢ in the afternoon. It was buying US88.38¢ in late trade.
Strategists said the Australian dollar was weighed down by a stronger US currency and tightening financial conditions in China.
The Fed said it would trim its $US85-billion-month ($95.7 billion-a-month) bond-buying program to $75 billion, with future reductions dependent on economic data. The Fed’s buying of mortgage and Treasury bonds were reduced by $5 billion each.
Volatile: The Australian dollar has had an eventful morning.
‘‘I’m not surprised to have seen traders initially mark the US dollar higher and the markets lower,’’ Westpac’s chief currency strategist Robert Rennie said.
But Mr Rennie said the statement was balanced by a clear indication from the central bank that it would continue to maintain a highly accommodative monetary policy as it closely monitored inflation and the unemployment rate.
Jobless rate key
The Australian dollar against other currencies.
The Fed added that it would maintain interest rates at very low levels until the jobless rate fall ‘‘well past’’ 6.5 per cent.
‘‘One section that really grabbed me when I read the statement was the use of the words ‘well past the time that the unemployment rate declines below 6.5 per cent’,’’ Mr Rennie said.
‘‘That’s a very important passage, because we know that the Fed has issues around whether the unemployment rate is a sign of strength in the economy.’’
The Fed chairman Ben Bernanke said in a press conference after the statement was released that the central bank ‘‘was not doing less’’.
‘‘The action today is intended to keep the level of accommodation the same overall, and to push the economy forward,’’ Mr Bernanke, who will step down as Fed chairman early next year, said.
The third-round of quantitative easing was launched by the Fed in September 2012 and involved buying $US40 billion in US government bonds and $US45 billion in mortgage-backed securities every month. It has seen ‘‘cheap money’’ support riskier assets such as the Australian dollar.
The Fed’s balance sheet has reached $US4 trillion since it started quantitative easing in 2008 after the financial crisis. The bond-buying program was in part meant to keep the yields on long-term bonds low so as to encourage growth in the housing markets and well as an increase in investments.
While the US dollar is expected to be moderately strengthened as the Fed continues to taper its asset purchases program, it could received another boost if the American economy recovers even better than expected, NAB’s co-head for currency strategy Ray Attrill said.
‘‘If the economy actually performs as the Fed is forecasting, and you look at their own forecasts for the Fed funds rate, you’d actually say the market is underestimating the potential for rates to go up a little earlier than they expect and rise a little faster,’’ Mr Attrill said, adding that expectations of an earlier tightening of US monetary policy could further strengthen the US dollar.
‘‘We’ve only got the Aussie down to 84 US cents at the end of next year, but I think the risks to that forecast are to the downside than the upside,’’ he said.
Meanwhile, tightening financial conditions in China, Australia’s largest trading partner, also pulled down the Australian and New Zealand dollars, RBS senior currency strategist Greg Gibbs said.
Mr Gibbs said Chinese rates were rising rapidly, with the one-year swap rate up by 25 basis points this week.
‘‘That’s a significant rise, and it concerns me. It concerns me on either - it’s going up and it could generate financial difficulties in China, or it could actually be telling us there are financial difficulties already,’’ Mr Gibbs said.
‘‘I want to be short the Australian dollar on the risk that turns out to be the case. I think that’s why the Aussie dollar is under pressure today and even why the New Zealand dollar is under pressure today, even though it’s had strong [figures] this week.
‘‘The Fed is obviously getting a lot of press and getting a lot of attention and in some ways, I think it has been a bit of a smokescreen for the last quarter, whereas events in China may well be the driving influence on why this Australian dollar has been so weak.’’
Financial markets had been trading cautiously ahead of the Fed’s announcement today. Reserve Bank governor Glenn Stevens said yesterday he would welcome the start to tapering, but that it could have ‘‘some disruptive effects’’.
The local currency has also been trading weakly against the euro, Sterling pound and the New Zealand dollar.
It was trading at four-year lows against the pound at 54.02 pence, at three-year lows against the euro at 64.48 euro cents, at five-year lows against the New Zealand dollar at $NZ107.7.