The main attention today is focused on the meeting of the US Congress, which will consider the issue of financing the work of the government, or, in other words, about the next lifting of restrictions on the growth of the national debt. Last night, the House of Representatives passed legislation to suspend the debt limit until December 2022, but there are high chances that the bill will not end up being passed today by the Senate, in which Republicans have 60 votes out of 100.
It is clear that no one is interested in a prolonged government shutdown, but short-term political interests in such cases often outweigh common sense. If a compromise cannot be found by the end of the day, investors will assess the development of the situation as increasing global risks.
The increase in energy prices is taking place against the background of a slowdown in production activity. We have already drawn attention to the fact that global PMI indices show a clear slowdown. The regional report of the Federal Reserve Bank of Richmond confirms the trend, so an increase in demand for protective assets can be expected.
It can be assumed that the US dollar remains the favorite on the currency market, even despite the political uncertainty that could lead to a halt in the work of the government. The commodity currencies will come under pressure, which will not be helped even by the rise in energy prices.
USD/CAD
The current week in Canada is uninformative both in terms of important macroeconomic publications and changes in political layouts. The past elections have only slightly changed the political situation, and the liberals have retained the status of a minority government, having received 150 seats in parliament (2 more). Therefore, there will be no changes in the economic strategy.
The other is more likely. The Liberals propose an additional $80 billion increase in spending. For five years, other major parties have also been offering their own financial plans, which call for increased spending on housing, healthcare, and other measures to counter the pandemic. Apparently, the consensus in Canadian society is in favor of increasing spending, which will entail an increase in the ratio of public debt to GDP. There may be a discrepancy between the monetary policies of the Bank of Canada and the Fed in the long term, which will lead to increased pressure on the loonie.
According to the CFTC report, the net short position in CAD over the reporting week rose by 1.443 billion and reached -2.174 billion. The target price is above the long-term average, which implies an increase in the USD/CAD pair.
It can be assumed that the conditions for buying this pair are improving. Growth is likely to continue and testing the local high of 1.2945 follows from the logic of behavior of large investors in the futures market. If the resistance is successfully broken, consolidation may come above the level of 1.30.
USD/JPY
A prolonged shortage of chips and logistical problems affect the pace of recovery of production in Japan. A shortage of electricity in China may increase the negative effect due to the risk of supply restrictions. Industrial production in August fell by 3.2% mom (for the second month in a row), and the production index is the lowest since May. Nevertheless, September forecasts are more positive, but it is obvious that no measures to normalize monetary policy can be expected in the current conditions.
The elected leader of the LDP Kishida has a very negative attitude to the prospect of strengthening the yen, so factors that can theoretically contribute to the strengthening of the yen will be blocked at least until the end of the current wave of the COVID-19 pandemic (the peak of which is predicted for December-January).
The weekly change of +454 million did not change the alignment of the yen in the futures market. The cumulative short position remains quite large (-6.417 billion). There is an upward exit from the range. We expected the Japanese yen to be more stable, but the total growth in demand for the US dollar blocked all calculations.
A departure from the range increases the probability of a successful test of the resistance zone 112.20/40, which will suit both the Japanese financial authorities and will correspond to the strengthening of the dollar rate, which looks more likely recently. The resistance level of 111.68 has turned into support, which will hold out unless a strong wave of risk aversion appears.