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A Fed Tapering Option Never Heard Before

A Fed Tapering Option Never Heard Before

Kathy Lien, Technical Strategist

For the first time, October has been put forth as a viable timetable for Fed tapering, and traders must now consider this option while examining new economic data and US labor market conditions.

Better-than-expected US economic data and hawkish comments from Atlanta Fed President Dennis Lockhart failed to provide much support to the US dollar (USD) this morning.

Despite the US trade balance reaching its best level since October 2009, the dollar barely budged. Investors were not impressed that the trade deficit narrowed 22.4% to -$34.2 billion, down from -$44.097 billion. The underlying improvements were also ideal, with exports rising 2.2% to a record high and imports falling 2.5%.

This is a quiet week for US economic data, but investors will continue to look for clues about how soon the Federal Reserve will begin tapering asset purchases. Unfortunately, the outdated trade balance data plays only a small role in the decision.

Earlier this morning, Fed President Lockhart said that a 180k-200k increase in jobs could lead to a reduction in bond purchases and that he wouldn't rule out a tapering move in October. While Lockhart is not a voting member of the Federal Open Market Committee (FOMC) this year, this is the first time that October has been put forth as a viable option.

Previously, the focus had been on the September and December meetings because of the pre-scheduled press conferences by Fed Chairman Ben Bernanke, but the central bank could also hold a special press conference after a move in October—an option that now shouldn't be ruled out completely.

The more important comments today will be from Chicago Fed President and FOMC voter Charles Evans this afternoon. Evans is a known dove whose comments will most likely err on the side of caution.

Today’s 2 Biggest Movers vs. the Dollar

Meanwhile, the Canadian dollar (CAD) and Australian dollar (AUD) have seen the greatest movements today against the greenback. Like the US, Canada enjoyed a sharp improvement in trade throughout the month of June. The country's trade deficit narrowed to CAD -0.47B from a downwardly revised CAD -0.78B. Exports rose 1.4% and reached a record high thanks to increased demand for cars and aircraft, and imports increased by 0.6%.

While Canada's trade balance is slowly crawling back towards a surplus, the fact that the export-dependent nation is running a deficit at all means that the economy is still suffering.

Much to the surprise of many traders, the decision by the Reserve Bank of Australia (RBA) to cut interest rates by 25 basis points (bps) to 2.5% turned out to be positive for the AUD.

See related: 2 Overnight Rallies, One of Which Makes Sense

The neutral tone of the RBA statement and the lack of update on China or the RBA outlook for the mining sector suggested that the central bank is not considering additional rate cuts at this time.

However, despite a 15% decline in the AUDUSD this year, the RBA still believes that the exchange rate is too high, which suggests that officials would be more comfortable with the AUDUSD trading between the 0.85 and 0.80 levels.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.