Fluctuations in US and European bond yields finally stopped and, on Tuesday, US stock indices renewed their record. Volatility in the currency markets dropped to a minimum, now market players are waiting for the new data on the US employment report, which will affect forecasts regarding the decision of the Fed. In the meantime, it is not necessary to expect strong movements. If the Nonfarm Payroll reports turn out to be strong, then the Fed may begin to cut QE in October, which will lead to a strong strengthening of the dollar.
Oil fell slightly on Wednesday, due, allegedly, to an increase in the cases of infection in China. Investors fear a slowdown in demand.
Market's attention is currently directed on the ADP employment report, and the recent manufacturing PMI report, especially in terms of the dynamics of the employment index, as the data may adjust the expectations on the Nonfarm Payrolls on Friday. As Fed has stated, the situation on the US labor market is a key criterion for the regulator to emphasize reducing the weight of inflation in forecasts, and therefore the publications of ADP and ISM can take trade out of narrow ranges if they differ from forecasts.
Canada's economic situation looks stable. The Delta variant of the COVID-19 virus is not yet showing strong spikes in incidence compared to the UK or parts of the US. Real GDP grew by 0.7% MoM in June (after a slight decline in April/May), leading indicators signal that the trend continues in July.
The June report showed that inflationary pressure in Canada decreased slightly during the month. Annual inflation stood at 3.1%, up from 3.4% in May, but core inflation remained unchanged, which gives reason to expect that inflationary pressure will intensify in the coming months.
The net long position on CAD decreased by 592 million to 426 million during the reporting week. The previously accumulated advantage is melting before our eyes, the estimated price is higher than the long-term average and is directed upwards, which is equivalent to a bullish forecast for USD/CAD.
We assume that an exit upward will follow from the consolidation zone, where the loonie is now located. The most likely scenario is a successful testing of the local maximum of 1.2804 and a move to the resistance zone of 1.2946/3016.
There is a growing discussion in Japan about the need to draw up a new stimulus package worth 30 trillion yen, which is regarded as a pre-election step, but even if it is implemented (presumably in September), it is unlikely to affect the liquidity of the yen. The fact is that, according to data from the Ministry of Finance, an unused amount from injections in 2020 has accumulated on its accounts, approximately equal to the plan under discussion, and the net surplus of the total account exceeded 4.5 trillion, which is also a record. The law requires that any surplus be converted into repayment of the government bond bubble, therefore, most likely, the new stimulus package will not increase the money supply and will not lead to an oversupply of the yen, which means that it will not be a bearish factor for the Japanese currency in any outcome of the discussion.
Economic data is within expectations, the inflation report for July showed an increase of 0.1%, as predicted, while the growth of industrial production in June slightly exceeded the forecast.
The net short position on the yen increased by 483 million to -6.824 billion during the reporting week, despite the fact that there is an obvious advantage in favor of the dollar in the combined futures/options report, the settlement price is directed down, that is, in favor of the yen. This is mainly due to the fall in UST yields, that is, a decrease in the probability of the Fed curtailing QE after the July meeting.
There was an attempt to update the minimum of 109.07, it is still unclear how successful it is, but the probability of further decline looks higher. The next target is 108.20, the movement to which may begin on Friday after the publication of the US employment report.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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