Major world markets showed negative dynamics on Wednesday after being suddenly overwhelmed by fears that the high rate of price growth could prompt central banks to start curtailing stimulus programs earlier than recently predicted.
Rising risks put some pressure on commodity currencies, which are slightly corrected in anticipation of the publication of the minutes of the Fed meeting. There is a possibility that today's "minutes" will not be as complacent as the representatives of the Fed tried to assure, and that the internal discussion on the rapid rise in prices still took place. Recall that the Fed officially considers the current rise in prices to be mainly a temporary factor, however, there are growing doubts about such a simplified interpretation.
The nervousness in financial markets underscores the importance of today's publication for re-evaluating forecasts. The size of the QE program, implemented by the Fed, significantly exceeds everything that was done during the years of fighting the 2008 crisis, and the rate of inflation growth is noticeably higher. The Fed will have to react in one way or another, which could cause an unpredictable reaction.
USD/CAD
The Canadian dollar received further support after the consumer price index (CPI) rose 3.4% YoY in April, compared with a 2.2% increase in March. Root inflation (excluding energy) rose by 1.6% YoY, which is also higher than March's 1.1%.
Even though such a significant increase in inflation is largely the effect of a low base (after the first decline in inflation in 10 years in April 2020), we still need to recognize that consumer demand in Canada is steadily recovering, which is a plus for the Canadian dollar.
On Thursday, the focus will be on the report on the private sector employment from ADP for April, after the March failure, a significant increase in jobs is expected, on Friday - the report on retail sales. Taking into account the fact that the growth of oil prices is slowly but surely gaining momentum, we can assume that both external and internal factors affecting the Canadian dollar's quotes are mostly in its favor.
The Canadian dollar managed to significantly increase the long position to 3.192 billion, the weekly change of +1.084 billion is second only to the euro. The estimated price is still below the long-term average and is directed down, the forecasts are the same - the loonie paired with the dollar looks stronger.
Now the loonie is in the middle of the descending channel and is testing the strength of the three-year low of 1.2060. While everything indicates that the minimum will be updated, the probability of an upward pullback is low. The next support is 1.1910, which is already a 6-year low, there are no serious resistances. Since the Canadian dollar has been strengthening since March 2020 without any corrections, the probability of a technical correction is growing, but first, a base will be formed.
USD/JPY
The preliminary estimate of GDP for Q1 shows a drop in Japan's real GDP by 1.3% QoQ, or 5.1% YoY. The drop is the result of several factors, the main of which is the second state of emergency in connection with COVID-19, declared just in January-March. As a result, consumer activity immediately fell, partly the reduction in spending on services and housing was offset by an increase in exports, but only partially.
The second quarter is also projected to be negative, and consumer spending is very low. In the current environment, inflation cannot be expected to start recovering, which means that strong deflationary pressure on the yen will continue. And where there is deflation, there is the status of a protective asset and fluctuations in the yen in the range, the boundaries of which will determine the global demand for risk.
Weekly changes in the futures market, as follows from the CFTC report, are insignificant, the yen remains a short position with a volume of 5.8 billion. The estimated price is almost horizontal, which means there is no direction.
The yen is trading in a range, forming a pattern with fading fluctuations, vaguely similar to a flag. The boundaries of the range are approximately 108.70/109.70, the exit direction has not yet formed. The yen is suitable at the current stage for range trading, but not for trend trading.