The FOMC minutes of the January meeting did not contain any surprises and generally matched the tone of comments made after the meeting. Most Committee members took note of the risks of "premature policy easing" and highlighted signs of more stable inflation. The market reaction to the release of the FOMC minutes was generally muted, but gradually, the dollar started a sell-off.
The decline in the dollar index after the release of the FOMC minutes is more of a technical nature since the market suddenly changed their expectations for a rate cut from March to June and this led to a strong rise in the USD earlier this year.
So far there is no news that can change the long-term perception of prospects. Global yields have slightly increased, and risk appetite is supported by the rise in the Chinese stock market, where authorities have taken measures to stabilize it.
Growing optimism is also supported by news from Europe, as consumer confidence has finally grown on the back of lower inflation and strong labor markets.
USD/CADInflation in January turned out to be significantly lower than forecasted. Canada's annual inflation rate slowed to 2.9% in January from 3.4% in December 2023, and the core rate from 2.6% to 2.4%. Of course, we can't guarantee the Bank of Canada's future course of actions by using just one month as a basis, but it is an important signal.
The Bank of Canada had previously indicated that it will assess progress in the fight against inflation in two phases. The first phase involves bringing core inflation closer to the 2% level, and the second phase - evidence that this movement will be sustainable, and only after that will the central bank begin discussing measures to ease financial conditions. For now, it is in the first phase, which means that we will not wait for comments about this, as Bank of Canada representatives will observe the situation.
The next meeting is scheduled for March 6th, and the market forecast currently suggests that the central bank will not take any actions in adjusting monetary policy.
The net short CAD position decreased by 169 million to -404 million over the reporting week, with positioning close to neutral and a slight bearish bias. The price is moving upwards, reacting to changes in rate and yield forecasts.
As long as USD/CAD remains above the support at 1.3412, any decline is considered a corrective move within the horizontal range. We expect a short-term downward movement, and a local low will be formed in the near future, after which the uptrend will resume. We expect the pair to return to the middle of the range at 1.3480/3500, followed by movement towards the local high at 1.3586 with an attempt to move higher towards the target at 1.3620.
USD/JPYThe Japanese stock index Nikkei hit an all-time high from 1989. Japanese companies have benefited from a weak yen, leading to increased exports, while domestic demand remains weak. New data indicates that the country fell into a technical recession in the fourth quarter.
On a quarter-on-quarter basis, Japan's economy contracted by 0.1% in Q4 2023 (0.4% in annual terms), according to Cabinet Office data. This marks the second consecutive quarter of negative growth. Fundamental indicators are very weak: consumer spending and capital expenditures, two pillars of domestic demand, have been shrinking for the third consecutive quarter.
Weak demand could pose a problem for the Bank of Japan's plans to exit negative interest rates. Preparations for this symbolic event are well underway, with Bank officials making numerous comments regarding upcoming actions. Since a rate hike for Japan, which is suffering from years of deflation, would be quite a blow to the economy, officials are trying to reassure the markets.
The speculative short position on the yen continues to increase. According to CFTC data, it grew by 2.128 billion to -9.245 billion over the reporting week, marking the most significant weekly depreciation among major world currencies. Markets do not believe that a 0.1% rate hike will dramatically change the situation, and the bearish bias remains intact. The price continues its upward movement.
The yen was the only currency that did not take advantage of the dollar's temporary weakness, and USD/JPY continues to trade just below the multi-year high of 151.92. There is no reason to expect a pullback, as risk asset purchases are gaining momentum again, typically associated with selling safe-havens. We expect the pair to move higher and even climb above 151.92. The BOJ won't be able to stop this process, and only the government's currency intervention can push the yen slightly lower. Hints of such a move have already been made, but it hasn't dampened speculators' enthusiasm.