Sifting Through the Latest Fed Signals

Fed members continue to hint that a December taper is a possibility although it's still a low-percentage possibility. The euro was the top performer while the Australian dollar lagged. Second-tier economic data is on the calendar for Japan.

The Fed's Lockhart said tapering could very well take place next month but his other comments suggested skepticism the economy will improve enough to make it a realistic possibility. He noted real concerns about the sustainability of jobs momentum, warned about low inflation and said policy should remain very accommodative.

Lockhart generally moves with the core of the FOMC and his lack of conviction is likely a reflection of how Bernanke and Yellen feel. Since the end of October, US dollar gains have been fuelled by rising expectations of a taper but anything beyond a roughly 25% probability of a December taper strikes us as out of line with Fed signals.

One Fed member who would like to continuing priming markets is Kocherlakota, who will be a voter in 2014. He reiterated his preference to expand forward guidance by lowering the unemployment threshold to 5.5%. He also criticized the people claiming the fall in the participation rate is demographic and argued discouraged workers are the primary factor.

Traders circulated a WSJ article about a former QE bond buyer. He made the argument that Fed buying and asset inflation is enabling the dysfunction in Washington. It's a sentiment we're increasingly hearing from market participants and could be a source of tapering pressure.

Early in Asia-Pacific trading an RBNZ report complained about the strong kiwi and that led to a quick 30-pip drop. Many traders have noted the textbook head & shoulders pattern on the NZD/USD chart. Up later, the focus shifts to Japan with September machine orders and the Oct CGPI on the docket at 2350 GMT.