[ForexNews]

The consumer confidence data yesterday had a startling effect on the mood of the market. Worries over fiscal sustainability, rising bond yields, political tensions about North Korea's explosion of a nuclear bomb etc which had led to a broad-based USD rally in the morning, melted away in response to the strong numbers. The successful 2yr Treasury auction added to optimism, but it is clear that the key event, especially for equity markets was the confidence data. It was a strong release - especially the forward-looking elements - and adds to the evidence that the risks to growth this year lie to the upside. However, all of the above issues remain. The worries about the US fiscal deficit were stressed once again by the strong language used by Professor John Taylor in today's Financial Times, who wrote that "the federal debt is exploding" and argued that "the risk posed by this debt ... could do more damage to the economy than the recent financial crisis". Strong though the confidence numbers were they were not so strong to completely change the picture. Significant risks remain, which leads us to suggest caution about jumping on the USD-sell off bandwagon. We expect it to fall further over the next few months but it is unlikely to be a smooth ride and in the short run it could be vulnerable to a reverse.

Today we have another Treasury auction: for USD35bn of 5y debt, and tomorrow a further USD26bn of 7y debt is due to be supplied. These longer maturities lead to more problems than the 2y auction yesterday because the general trend for large investors to shorten the duration of their bond holdings means that 2y debt is very attractive at present. US April existing home sales is also an important release. Looking past the monthly volatility, they have held roughly steady since November. A rise in sales in April would be consistent with the gains in pending home sales in February and March. Many investors argue that an improvement in the housing market is a necessary condition for a sustained recovery. The causality may be the reverse - that a sustained recovery is the only way the housing market is going to recover - but nonetheless a downside surprise may highlight the risks in the current environment.