Markets are showing a fair bit of volatility on the taper announcement. The Australian dollar was smashed when news hit the tape, breaking to a three year low below 88.47 briefly but then rebounding strongly and is now weakening below former support:
Stocks jumped over one percent as the very dovish forward guidance of not actually raising rates until unemployment is a long way past 6.5% trumped the taper itself.
Long bonds also sold heavily on the announcement but then rebounded strongly:
Yields broke through the recent ceiling at 3.9% to 3.95% before heading back to the ceiling.
Gold is also heading lower, down 1%.
Bernanke hinted in his press conference that the $10 billion taper is now the chosen increment for policy shifts and anticipated that the pace of reductions will be steady until full removal mid next year. However, he made the very strong point that these increments will be data-dependent and could slow or accelerate any time.
My own view remains that we’ll see a trend develop towards higher long bond yields for the next few months, more rising stocks over the next year and an intact medium term downtrend in the Australian dollar.
That is until US housing slows too much and tapering pauses or reverses.
