Today, investors' attention is focused on the publication of the US consumer inflation data, which will allow reassessing the prospects of the US Federal Reserve's actions at the September meeting.
As for economic and political news, the US Senate confidently approved the infrastructure bill, which includes $ 550 billion of new spending commitments, although House Speaker Nancy Pelosi remains adamant that the law will not be put to a vote in the House until the Senate completes approval of the $ 3.5 trillion budget bill proposed by the Biden administration. This is unlikely to be a quick process and is highly likely to smoothly move to negotiations on the debt ceiling since there are no funds for the infrastructure plan in full. The final figure may be significantly less than $ 3.5 trillion.
The Fed members did not give any new inputs. The head of Fed Cleveland, Mester, spoke yesterday. She talked about the need to understand the dynamics of inflation in the post-pandemic era not only in the United States. However, she did not say a word about monetary policy.
USD/CAD
The report on the Canadian labor market for July was released simultaneously with the American report, and it turned out to be noticeably worse – the increase in 94 thousand new jobs is below forecasts, the unemployment rate is 7.5%, and not 7.4%, as expected. However, we must proceed from the fact that the Canadian labor market was recovering at a noticeably faster rate earlier, and only 246 thousand jobs remained in Canada before the restoration of the pre-pandemic employment level. This task looks more achievable than the full recovery of the US labor market.
Analyzing the pace of global economic recovery, Scotiabank suggests that Norway and New Zealand will be the first to start raising rates, and Canada will join them a little later. This means that the Canadian dollar has a potential hidden driver for growth, which directly follows from the expected change in the yield spread in its favor.
However, this will happen not earlier than the second half of 2022. The net long position in CAD rose by 169 million over the reporting week, reaching 595 million. The preponderance looks bullish, but according to a number of other criteria, the Canadian dollar is still weaker than the US dollar.
The estimated price is above the long-term average, which gives reason to expect the continued growth of the USD/CAD pair, but the dynamics are lost and the momentum is weak.
The situation can be called neutral-bullish. The nearest target is 1.2545. Growth is possible to the level of 1.2700, but this requires the appearance of a new strong impulse.
USD/JPY
The US dollar strengthened significantly against the Japanese yen, but this growth was largely due to a decline in global risks, and not to the strength of the dollar or the weakness of the yen.
It also showed a similar movement against gold, which is a reaction to a strong employment report, which cannot be long-term. At the same time, the target price is slightly below the average, that is, the chances of breaking through the high of 111.67 look weak.
Japan's economic situation looks somewhat different than in most of the G10 countries. On the one hand, there has been a current account surplus for 83 months, and it has been growing in recent months. The trade surplus gives the Cabinet a little more space for action than in the same US, where the chronic deficit is growing without any signs of slowing down.
At the same time, it is not possible to disperse inflation by any means. Like most other central banks, the Bank of Japan has set the target at 2% and does not reduce it, while inflation, calculated on the basis of 2020, declined by 0.5%. Meanwhile, household spending in June fell by 5.1% yoy, which means there is no chance of seeing inflation even close to the stated target.
The weakening of the yen is a factor contributing to the growth of inflation due to the rise in the cost of imports, so the growth of USD/JPY is generally supported by the financial authorities of Japan. But given that the settlement price is not growing, it should be noted that large investors are waiting for either a continuation of trading in the current range or a decline. Therefore, it can be concluded that as we approach the level of 111.67, the chances of forming a top will increase and we need to look for an opportunity to sell.