The optimistic mood in global markets remains on Wednesday morning, stock markets are trading in the green zone, and US Treasury yields surged, pulling the overall growth in yields across the entire market spectrum. The largest growth is shown by commodity currencies, which is not surprising given the increase in oil prices (Brent is trading above $ 70 per barrel again). Iron ore in Singapore immediately rose by 11.9%, while the Bloomberg commodity index rose by 1.4% over the day.
In one of the previous reviews, it was noticed that several leading indicate an approaching slowdown in production activity. And indeed, the Markit PMI indices published on Monday turned out to be noticeably weaker than forecasts (including for the services sector). The report of the Federal Reserve Bank of Richmond showed a slowdown from 27p to 9p, despite the fact that 25p was predicted. The growth rates of all three components of the index decreased – product shipments, new orders, and employment in the sector.
With more data indicating that the positive momentum generated by the global economy's exit from the lockdown has not been as long-lasting as anticipated, there are fewer reasons to expect the Fed to confidently reduce incentives.
Perhaps, the solution is to redistribute the burden between the Fed and the government. House Democratic leaders have pledged to vote on a bipartisan infrastructure bill by the end of next month, raising the prospect of a $ 3.5 trillion infrastructure package passing through Congress without the participation of Republicans. Accordingly, the Fed will have the opportunity to announce the beginning of the end of QE, which will have a stabilizing effect on the financial market. But at the same time, the support for the US economy will not decrease, but even increase, since the estimated infrastructure costs will more than cover the decline in QE volumes. The main changes may occur in September, so the speeches of J.Powell and the Democratic leaders in Jackson Hole can show the markets the direction for the coming months.
Wednesday's trading is expected to go mainly in narrow ranges. The US dollar remains the leader, commodities and commodity currencies are also positive, under pressure from defensive assets.
USD/CAD
As follows from the CFTC report, the Canadian dollar's long position continues to decline, with losses amounting to 306 million in the reporting week. Its advantage dropped to 211 million. The target price is above the long-term average and is directed upwards.
At the moment, there are practically no internal drivers that can accelerate the movement of the Canadian dollar in one direction or another. Even the federal election campaign does not have any influence on the quotes, which is not surprising amid the polls showing that the election result will not significantly change the balance of power in the parliament if it does not change at all.
The US dollar has pulled back down after the formed peak of 1.2950, short-term bearish factors are weakening, and a further downward correction is unlikely. We do not expect strong movements before Powell's speech. On Friday, the most likely scenario is a slow growth, the nearest resistance is set at 1.2645/55, then 1.2720 and 1.2785.
USD/JPY
The core consumer price index declined by 0.6% y/y in July. The inflationary dynamics is obvious, in contrast to the US, where inflation is rising. There is no chance that the Bank of Japan can consider exiting the super-soft policy in the near future.
There are no signs of a yen reversal on the futures market. The net-short position has increased again, reaching -7.209 billion. This is the maximum advantage of the dollar against any of the G10 currencies. The settlement price does not give direction again.
The most likely scenario for the yen is to continue trading in the range until any certainty emerges. The risk of a resumption of the dollar's growth is slightly more likely since the speculative advantage is significant and it should receive some kind of resolution. To exit the range, a confident breakdown of either support at 108.75 or resistance at 110.80 is required.