The US dollar has strengthened sharply across the entire spectrum of the currency market after it became known on Tuesday that there was an increased likelihood of a political impasse over a new stimulus package. Speaking to Fox News, the Republican leader in the US Senate, Mitch McConnell, said that after the talks stopped at the end of last week, the Trump administration made no attempt to resume consultations with democratic leaders in Congress. There was hope that the talks would resume this week, but after McConnell's comment, the likelihood increased that the political crisis could drag on for several weeks.
Gold declined by more than 6%, but this reaction was expected by the market, since technically overbought was obvious. Moreover, the renewal of the maximum required a correction at least to the level of the previous peak. Simultaneously with gold, the demand for bonds also declined, the yield on 10-year treasures reached a monthly maximum, and even a decline in stock indices is unlikely to lead to an increase in negative mood, which is indirectly confirmed by the stability of oil prices.
The report on producer prices in July is positive, the rise in prices is slightly ahead of forecasts, which gives reason to expect that consumer inflation in July also rose - the release will be published today, and if the forecasts are confirmed, it will provide additional support to the dollar.
In general, we should assume that the dollar is returning to the growth course, and the demand for protective assets is decreasing in the short-term, which gives an advantage to commodity currencies in crosses against protective ones.
USD/CAD
The Canadian dollar looks stronger than other commodity currencies, and the dollar's corrective growth is unconvincing. At the same time, the settlement price is making an attempt to turn up after a period of prolonged decline, and the net short position of CAD on CME, according to the latest CFTC report, increased by almost a third and reached 1.741 billion.
The upward reversal has not been completed yet, the attempt to go above 1.34 was unsuccessful, but the Canadian currency still feels quite confident. Scotiabank notes that the Canadian economy is confidently heading towards recovery, besides, the stability of the loonie is supported by oil prices. The Bloomberg Confidence Index, which measures financial strength and economic expectations, has consolidated in the expansion zone at 51p for the first time since March.
Nevertheless, expectations of a gradual return of the dollar to a bullish course will not bypass the Canadian side. There is a high probability of exiting from the range which will take place upwards, we expect a consistent passage of 1.3400 and 1.3460 in the next few days.
USD/JPY
As expected, the yen is back in range and is currently close to the target price level. The net long position in the yen rose by 325 million last week to reach 3.716 billion, but even this bullish factor could not keep the yen on the upward course.
Mizuho Bank notes that Japan's economy is on a downturn course and no amount of action by the Abe government can remedy the situation. The TS multiplier (TOPIX divided by S & P500) as a measure of the relative strength of the Japanese and US stock indices shows that investors have no illusions about the prospects for the Japanese economy. Since 2018, the multiplier has been decreasing with little or no correction.
The graph visually reflects all the problems of the Japanese economy - the deflationary threat has not disappeared anywhere, Japanese manufacturers are losing the fight for world markets to China, and the purchase of ETFs by the Bank of Japan supported the stock market, but destroyed the market pricing mechanism at the same time. As a result of which, foreign investors left Japan.
The demand for the yen as a currency has fallen, In a speculative sense, it is still a defensive asset, but its significance is declining. As a result, the Eco Watchers indicators from the Cabinet of Ministers have been in a squeeze zone since January 2018, which is also a bearish factor for the yen.
The USD/JPY goes above the middle of the channel. The target is 108.10/20 and so, the upward movement is technically reasonable.