QE Is Cut : Pound to Australian Dollar / Canadian Dollar & New Zealand Dollar Exchange Rate Forecast To Spiral

Modified: Thursday, 19 December 2013 10:35 BST - Written by David Woodsmith

STORY LINK QE Is Cut : Pound to Australian Dollar / Canadian Dollar & New Zealand Dollar Exchange Rate Forecast To Spiral

Its official – the taper has begun. The US Federal Reserve announced last night that it is set to reduce the $85bn per month which it has been allocating to its controversial QE scheme for the whole of 2013 to a monthly $75bn as we head into 2014.

The Fed’s policy committee stated that recent evidence of a firming of conditions in America’s domestic labour market was the primary driver behind the decision. Most analysts had anticipated that the US central bank would opt to maintain its bond buying programme at $85bn, so the move has proved to be market-moving.

The Pound Australian Dollar exchange rate (GBP/AUD) spiralled to its highest level since the beginning of 2010

By the final pert of last night’s North American equities session, the big losers following the decision had been the Commodity Dollars. The Pound Australian Dollar exchange rate (GBP/AUD) had spiralled to its highest level since the beginning of 2010, reaching as high as 1.8556. Meanwhile, the New Zealand and Canadian Dollars had incurred similar losses against Sterling, sending GBP NZD and GBP CAD up to 2.0027 and 1.7541 respectively as investors fretted about the potential dampening effect which a cut to QE may have on global demand for raw materials.

However, by the US equities close, the broad-ranging S&P 500 index had climbed by over 1.00%, suggesting that a fair percentage of market participants had been anticipating a greater QE cut from the Fed. The fact that the $10bn reduction to asset purchase in the States failed to dim investors’ appetite for risk implies that the sharp move forward for GBP AUD, GBP NZD and GBP CAD may be ephemeral. If this does prove to be the case, and yesterday’s gains for world share markets were not a mere continuation of the traditional ‘Santa rally’ experienced by equities markets during the Festive period, then the Commodity Dollars may push ahead against Sterling once the dust has settled on the Fed decision.

However, the fact that the $VIX ‘fear index’, which measures the number of protective ‘puts’ placed on equities trades in the States, has gained on 14 of the 16 trading days leading up to the Fed’s decision suggests that we may be due a dip in global investor sentiment which would weaken the AUD, NZD and CAD further.

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