Markets Cool as Taper Time Nears

The dollar edged lower on Tuesday as the market weighed the overwhelming likelihood Yellen will take over the Fed. The kiwi was the top performer while USD and JPY lagged. Chinese property prices and Australia's leading index are on the Asia-Pacific calendar.

Consolidation was the theme of US trading. Stocks were upbeat with the S&P 500 gaining 0.4% and that helped USD/JPY to 99.38 but the gains later ebbed and the pair finished the day virtually unchanged at 99.13.

The New Zealand dollar remained stubbornly bid as it broke yesterday's high to 0.8249 – a four month high. Technically, there is very little separating NZD/USD from 0.8575 save for developing overbought conditions and the possibility of a Fed-driven dollar rally.

Wednesday's Fed announcement has the potential to create major waves. The size and composition of the taper are important but forward guidance, forecasts and other signals may be equally critical. We will focus on the broad taper path rather than the headline number. Signals about when the Fed plans to completely end asset purchases are critical. That timeline is currently 'about mid-2014' according to Bernanke but if they vary, that will likely be the main dollar driver.

Looking ahead, there will be some minor events in the hours ahead. Up first at 0020 GMT RBA assistant governor Edey speaks in Sydney. The market is fully expecting the central bank to stay on the sidelines for several months as they wait and see how rate cuts filter through.

At 0030 GMT, Westpac releases its leading index for July. In June, the composite was flat. An hour later, data on August Chinese property prices will be released. Lending risks for China have diminished but real estate remains the major risk for the Chinese economy.