Stronger U.S. Data Keeps Dollar Bid

Better-than-expected economic data helped the U.S. dollar recover part of its earlier losses at the start of the North American trading session. The greenback had initially traded lower after a central bank official from China said that liquidity risk is controllable and they will keep money rates at a reasonable level. The People's Bank of China feels that the run up in SHIBOR rates is seasonal and will disappear gradually. The deep-pocketed central bank has plenty of flexibility to inject liquidity when they see fit. Also a number of bills are scheduled to mature next month, which should help boost the amount of money in circulation and ease lending rates in China. Global equities are trading higher on the back of the reassurance from China's central bank and upside surprises in U.S. data.

Recovery Confirmation
Across the Pacific in the U.S., the latest economic reports continue to paint the picture of a gradual recovery in the U.S. economy. Consumer confidence jumped to a 4.5-, almost 5-year high in the month of June. The Conference Board's index surged to 81.4 from 74.3. Despite the decline in stocks, U.S. consumers remain optimistic about the outlook for the economy, which will encourage the Federal Reserve to move forward with their plans to taper this year. New Home sales also rose 2.1% and while the pace growth slowed, it was much stronger than expected and sales in April were revised higher. Unfortunately homes remained on market for a slightly longer period of time and the average price declined. Nonetheless, there is still decent momentum in the sector. Durable goods orders rose 3.6% in the month of May thanks to a surge in Boeing aircraft orders. Excluding transportation, the gain was a more modest 0.7%. While the increase was less than the prior month, it was significantly more than expected. House prices on the other hand were mixed with S&P Case Shiller reporting faster house price growth and the House Price Index reporting slower growth.

Meanwhile the euro received very little help from ECB President Draghi who spoke this morning. The head of the European Central Bank said the "economic outlook still warrants an accommodative stance" which isn't completely surprising given the recent rise in European yields and the uncertainty that it creates for the region. Draghi did not mention the rise in yields but between his comment on the economic outlook and ECB member Coeure's comment earlier in the day that the exit from loose monetary policy is distant, the European central bank is trailing far behind the Federal Reserve, a dynamic that could keep pressure on the EUR/USD.

Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

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