Asian trading on Tuesday was again dominated by Chinese developments with the Shanghai equity market falling by a further 5% during the session. There was a move by the PBOC to ease liquidity pressures which provided some reassurance and the benchmark index was able to move back towards the opening level. The recovery helped underpin risk appetite with USD/JPY finding support on dips towards the 97.25 level while commodity currencies also rallied.
Over the past 24 hours, there has been a sustained barrage of rhetoric from global central bankers over US monetary policy. US Regional Presidents Kocherlakota from the dovish end of the spectrum and Fisher from the hawkish end both looked to reassure markets that interest rates would remain at extremely low levels even if there was any tapering of bond purchases. There were similar comments from Bank of England Governor King in his Treasury Select Committee testimony.
There was a clear suspicion that central banks were looking to soothe bond markets following the round of aggressive selling seen since the Federal Reserve statement last week. Although there was some stabilisation in bond markets, underlying dollar demand remained solid.
The US data releases were stronger than expected with durable goods orders rising 3.6% following a 3.5% gain the previous month. The underlying data was also stronger than expected with a monthly increase of 0.7% which provided an initial boost to US confidence.
The subsequent releases were also stronger than expected with new home sales of 476,000 in the latest month from 466,000 previously while there was a stronger than expected reading for the Richmond Fed index. To complete the picture, US consumer confidence rose further to a fresh five-year high at 81.4 from 74.3 as energy costs boosted sentiment.
The US data releases tended to put renewed upward pressure on yields which also triggered fresh dollar support. EUR/USD dipped to lows below 1.3070 as markets again looked to test important technical levels before a limited recovery.
Bank of England Governor King offered little in the way of fresh insight into the UK economy or monetary policy. There was stronger than expected data for UK mortgage approvals which maintained confidence in the housing sector while the CBI retail sales survey registered a reading of 1 from -11 previously.
Underlying confidence in the outlook remained very fragile with the government battling to sustain market confidence ahead Wednesday’s spending review. GBP/USD pushed to a high in the 1.5480 area before being pushed back to a further test of support near 1.54 later in New York.