The Head of the Federal Reserve, J. Powell, expressed his confidence again that the growth in inflation is temporary while speaking in the US Congress. In addition, he expects a sharp increase in employment by fall. At the same time, the normally hawkish CEO of the Fed Cleveland, L. Mester, said that she expected more clarity in September. This was followed by the Fed President of San Francisco, Mary Daly, who stated that significant further progress is approaching. However, New York Fed President John Williams said that we are not near to significant progress.
In other words, the position of the Fed members comes down to the fact that it will begin to discuss the gradual curtailment of QE in September, which, will begin no earlier than 2022. This is a bullish factor for risky assets.
On Tuesday evening, the CFTC's long-delayed report was finally released. There were no signs of a change in the position of investors on June 15, that is, just before the day of the FOMC meeting – the total position on the dollar lost another 730 million, all commodity currencies were in the red zone, but long positions on the euro, pound and franc still increased.
It looks as if investors are set for faster growth in Europe. The decline in commodity currencies could be regarded as a sign of flight from risk, but at the same time, the short position on the yen increased, and gold lost $ 3.935 billion, which does not fit with the growth of risks.
The report should be regarded as a sign of the players' repositioning before the FOMC meeting, but we will find out what they concluded in the long term on Friday evening.
USD/CAD
Over the reporting week, the Canadian dollar's net long position fell insignificantly from 3.739 billion to 3.632 billion. Such a slight change would not have been able to reverse long-term expectations, but the dynamics of the yield spread, which ultimately allowed the target price to go above the long-term average, added negativity.
It is possible that this does not mean anything yet. In January and March, the calculated price also showed signs of a reversal, and then declined again.
The main question on the state of the Canadian economy is the stability of inflation. Prices are rising at the fastest pace in a decade, with overall inflation rising to 3.6% in May, while there were still quite strong restrictions in April and May. In all likelihood, June and July will show even stronger price growth.
And since it is now considered that the inflation growth is temporary, the Bank of Canada is unlikely to take any measures to contain it, but it is clear that the need for a super-soft monetary policy has declined. If the trend remains stable, it is inevitable to reduce asset purchases and increase the overnight rate. These considerations will not allow the Canadian dollar to develop a fall. Nevertheless, we can expect an upward correction to the resistance zone of 1.2630/50 based on the current dynamics of the estimated price.
USD/JPY
Japanese yen's short position immediately rose by 1.06 billion, namely to -5.32 billion. The target price is close to the long-term average. There is an upward dynamics, but the trend is still unstable.
It is worth noting that Japanese stocks sharply fell after the announcement of the results of the FOMC meeting. TOPIX index plunged by 2.55% immediately after the opening, which led to a quick reaction of the Bank of Japan – it bought an ETF worth 70.1 billion yen on Thursday. This was the first purchase since April 21. Now, we need to proceed with new circumstances. First, a possible tightening of the Fed policy will lead to a sell-off in Japanese stocks. Secondly, the Bank of Japan will continue to conduct currency interventions disguised as ETF purchases in order to prevent the stock market from falling.
This means that Japan's economy is currently unstable, and the financial system is being kept in balance by the BoJ's decisive actions. This is a negative factor for the yen. We expect the local high of 111.0 to be tested in the near future. The next target is 112.20/40, but it should be assumed that there is no currently stable trend in the yen.