The weaker-than-forecast US consumer inflation data did not lead to a sell-off in the dollar and lower inflation expectations. The yield on the 5-year inflation-protected TIPS bonds did not decline at the end of the day, but rose to 2.47%, which is the highest since the pre-crisis July 2008. It can be stated that the US markets are ready to master a new stimulus package of 1.9 trillion, while it is assumed that there will be a strong consumer spending and inflation growth, which will help restore the economy affected by COVID-19.
The growth in oil demand continues. The rapid arrival of spring in the northern hemisphere will lead to a decline in the seasonal activity of the virus, and the high rate of vaccination will finally finish it. This will contribute to a rapid recovery, along with record measures to support the economies; hence, the validity of expectations of further price growth for raw materials and commodity currencies. In turn, the US dollar is unlikely to move up tomorrow.
USD/CAD
Apparently, the Canadian dollar still looks more promising than its American counterpart. Its long position in the futures market continues to grow and has already reached 0.726 billion. At the same time, the estimated price is confidently below the long-term average. In this case, there is a high probability that the pair will continue to fall.
The markets were not impressed with the results of the Bank of Canada meeting that ended on Wednesday. In contrast to the expected moderately "hawkish" rhetoric, the BoC decided not to cut the bond-buying program and not to signal a rate hike. As a result of which, the CAD slightly weakened. Thus, there was no formation of a news impulse.
Nevertheless, the USD/CAD pair is still expected to decline after the consolidation ends. The first data for 2021 comes out better than forecasted, which resulted in the growth of Canada's yield. Moreover, commodity prices continue to rise due to expectations of an increase in the pace of global economic recovery and limited supply.
It is possible that the main factor that hinders the growth of a Canadian dollar is the low rates of vaccination when compared with the US and UK. There are concerns that the Canadian economic recovery may slow down because of this. Nevertheless, we expect that the consolidation period will be completed with a downward movement of the USD/CAD. The breakdown of the support area of 1.2575/90 will strengthen the movement. The target is to update the low of 1.2466.
USD/JPY
Japanese yen's net long position in the futures market continues to sharply decline. According to the CFTC report, it fell by 1.142 billion to 2.258 billion. If such rates continue, the yen may form a short position. The settlement price of the USD/JPY pair is sharply rising and so, there are low chances of a downward reversal.
It is believed that the main reason for JPY sell-off lies outside of Japan. In particular, this is primarily the growth in demand for risky assets amid price growth of oil and raw materials in general, as well as hopes for an early victory over COVID-19 through large-scale vaccination. However, the internal reasons for the weak yen are no less convincing.
On March 5, the 10-year bond yield experienced its strongest intraday drop since February 2020. The reason was the speech of the BoJ Governor Haruhiko Kuroda in front of the budget committee of the lower house of parliament, where he clearly announced that the Bank of Japan is not going to expand its estimated range of returns. Since the yields of similar bonds in the US and most other countries have been rising steadily in recent months, speculators expected the BoJ to support this trend and announce an expansion. Unfortunately, it didn't work out. The relatively low returns indicate that Japanese assets are less attractive.
It is clear that the Bank of Japan is interested in a weak Japanese yen, as is the government. The published economic data show that consumer spending can not recover, January's real household spending declined by 7.3%, considering the seasonality. The percentage of disposable income is also falling.
Meanwhile, preliminary labor market data show that there is a drop in wages, and there are no prospects for a steady increase in consumer spending.
Everything indicates that the Japanese yen's weakness will continue. The USD/JPY pair broke through the resistance area of 108.00/20, which turned into support, followed by a local high of 109.86. The medium-term target is a strong resistance zone of 112.20/40.