Tapering starts, dollar goes down, share market goes up . . .

Within hours of the American Federal Reserve announcing that it was going to begin ‘tapering’ (i.e., cutting back) on its quantitative easing programme (i.e., pumping huge gobs of money into the American banking system) the Australian dollar corrected back to around 88 cents. So the dollar rate correction that our own Reserve Bank has been trying to achieve with almost two years of interest rate reductions happened within seconds of this tapering announcement.

On the morning of the day after the announcement our stock market jumps up by over 200 points, and on the second day it climbs a further 60. And the expectation is that the only way is up for our stock market over the next few trading months, especially for resource companies.

The stock market goes up because a lower American dollars means instant higher profits for all the resource companies. At the stroke of pen, well in these days at the push of some computer buttons, all the resource companies are now going to make something around 7.5 percent more money out of every tonne of ore they ship—assuming our dollar stays at around 88 cents.

This just goes to illustrate the brutal and immediate impact of American economics on Australia (and many other countries as well).

All those cash interest rate drops by the Australian Reserve had basically nil effect on the exchange rate. America decides to taper its quantitative easy programme by about 12 percent, and down plunges the dollar.

Another thing this does is totally take the pressure off the Australian Reserve Bank for any further cash rate reductions. With the dollar down at 88 cents they could even contemplate starting the get the cash rate back up to a healthy number. Something around 5 to 5.5 percent from the very low 2.5 percent where it sits now. Especially as this is just the beginning of quantitative easing, which means that the American Reserve plan to continue reducing easy moving forward—assuming nothing goes wrong with the American economy.

So the dollar should fall further with each slice of easing.

As they always say, 2014 is going to be interesting. There is a view that by the end of 2014 our stock market could make it all they way up to 6,000 points. This will still be 800 points lower than it was in 2007 before the GFC, but it will finally be getting almost back to where it was.

BarryMark