The head of the Fed, J.Powell, made a loud and clearly hawkish statement in the US Senate. According to him, the time has come to abandon the word "temporary" when describing inflation, and, given that "inflationary pressure is high," he will consider stopping purchases of our assets maybe a few months earlier.
Indeed, it is difficult to consider the phenomenon temporary if we look at the inflation chart. Nothing temporary is even close to being observed here.
Therefore, the probability that the Fed will completely close QE, not in June, but in March, has increased. This may also mean that the Fed will have matured to the first rate hike by May/June, and it may raise the rate three times by the end of the year, and not twice, as predicted recently.
Stock indexes immediately declined, because the reduction in the inflow of cheap money will not allow growth to continue, which means that the time has come for profit-taking. The news that will support the US dollar, as it gives it a chance to lead the yield race, will simultaneously contribute to the flight from risk.
USD/CAD
Canada's GDP growth of 5.4% in the 3rd quarter was unexpected. It was predicted about 3% or even less, since the negative impact of supply restrictions and a drop in agricultural production increased on economic activity, but, as it turned out, the lifting of restrictions and the associated rapid growth of the service sector compensated for all the disadvantages.
Accordingly, arguments were added in favor of raising the rate before the Bank of Canada's meeting on December 8, and if it were not for a new COVID-19mutation, which for some reason looks very frightening at the moment, it would be possible to predict a decline in the USD/CAD pair. Now, we have to wait for the end of the panic, the rise in oil prices, and the removal of the threat of new lockdowns. Until this happens, there will be a low probability of decisive action by the BoC.
It seems that investors also assume that the BoC will show moderation and will not hurry. The weekly change in futures for the Canadian dollar was -941 million, respectively, against the background of falling yields. The settlement price turned up, which reduces the likelihood of a downward reversal.
It can be assumed that until the panic subsides, the USD/CAD pair will continue to grow. The long-term target is shifting to the resistance zone of 1.2960/3010, the upward momentum is strong, and the chances of a corrective decline are weak.
USD/JPY
Since inflation in Japan is still close to zero, the Bank of Japan is dealing with a completely different reality than other major central banks. Although the rise in energy prices has led to a slight increase in inflation, the selling prices of enterprises are growing very slowly, and in general, it is unclear why to abandon incentives if there is no growing price pressure. Again, Japanese banks are very willing to pick up the flash mob regarding the terrible strain of Omicron and are already talking about the need to introduce new restrictions.
Mizuho Bank broke into a panic article on this topic. This whole strategy is designed to delay the expiration of incentives as much as possible.
In fact, the BoJ reduced purchases of government bonds until 2021, without causing any surges in the yield curve, which has been fixed at 0% for 10-year T-bills since 2016. The weakening of the yen stimulates economic recovery. Why change what already works?
According to the CFTC report, the net short position increased by 420 million to -10.56 billion. The mood of the players is frankly bearish and the estimated price is directed downwards. This may mean the probability of a downward correction amid the growth of panic, but it is unlikely that this decline will be prolonged.
An attempt to gain a foothold below the previous low of 112.75 was unsuccessful. Another attempt is possible, and if it is successful, a further decline to 11.90/112.10 is possible. However, a new base will most likely be found soon with an upward reversal.