Yesterday, Ms. Pelosi and Mr. Mnuchin stated that they will reach an agreement on a new stimulus package soon. This news had a positive effect on the markets: the US stock indices closed in a positive zone, while the dollar declined as it awaited growth in the supply of liquidity.
There will be another meeting tonight, which can likely be followed by a sharp surge in volatility. On the other hand, any positive news from the negotiations can let the dollar decline.
In other positive news, Moderna has announced that it intends to start using the vaccine in December if positive results are obtained in November. However, this news can be refuted any time. Meanwhile, the second wave of COVID-19 is rapidly spreading, forcing countries to tighten quarantine measures one after another.
USD/CAD
Several indicators will be published today in order to assess Canada's level of consumer demand – consumer inflation and home price index in September, as well as retail sales in August. This assessment is important to predict the result of the Bank of Canada meeting on October 28.
Last Monday, BoC published a survey of the economic situation, but the result was more disappointing than optimistic, despite the fact that the survey among businesses was conducted before mid-September, that is, even before the start of the second wave of COVID-19. Moreover, a significant number of businesses believe that their sales will not return to pre-crisis levels for at least another 12 months, even though restrictive measures were lifted during summer. Thus, we continue to have weak business sentiment, and the economy is still experiencing overcapacity.
The pace of wage growth is dominated by negative expectations. Growth should slow down in the next 12 months.
The results of the study should be considered negative – the Canadian economy has very limited opportunities for resuming growth. Accordingly, internal factors that can support the strengthening of the Canadian dollar are not enough.
If the Bank of Canada takes a break and does not introduce new incentive measures, then the fate of CAD will highly rely on the development of the US pre-election situation. The Canadian dollar has the highest correlation among major currencies with the US stock market, which means that any news that could support the stock (such as the announcement of a new stimulus package) is automatically a bullish factor for it.
In view of this, there were reports of possible progress in the negotiations between Mnuchin and Pelosi since yesterday. This resulted in a bullish impulse of CAD. It is possible that it will develop, if confirmed in the next few days.
ON CME, the net short position in CAD declined by 323 million to -1.032 billion over the reporting week, as there is no strong direction. The estimated price is higher than the spot price, but the dollar failed to rise, since it is considered that Trump's chance of winning the election has declined, which limits the growth of the USD/CAD pair.
Therefore, a neutral result from today's macroeconomic data with a slight margin towards the negative, which may put some pressure on the CAD can be expected. But the main driver is the results of negotiations on US new incentives.
The absence of a positive trend will turn USD/CAD up, and the likely formation of a base above 1.2990 will change the technical picture to a bullish one. If positivity is confirmed, moving to the level of 1.2990 will be clear, with a further goal of 1.2750/70.
USDJPY
The net long position in the yen was lowered by 130 million, but the yen has been sold off for several weeks in a row, which indicated positive market expectations for the global economic recovery.
At the same time, recent data indicate that these expectations are at risk of not being implemented. The demand for the yen is dictated entirely by the balance of external risks, as there is a slowdown in the supply of the Japanese currency by exporters and investment prospects have worsened.
The risk assessment is directly related to the upcoming elections in the US. Its results will allow us to assess the amount of the dollar's offered liquidity. If Biden wins, he is expected to provide more liquidity and more incentives, which will lead to a weaker dollar and increased demand for risk, which means a weaker yen. On the contrary, Trump's victory will lead to the opposite effect – increased tensions, lack of liquidity, and demand for defensive assets.
This morning, there is a high probability of a technical pullback up to the resistance level 106.10/25.
