Last night, US Treasury Secretary Janet Yellen slightly shocked the markets with her speech. She said that maybe it is necessary for the interest rates to increase a little in order to keep the economy from "overheating." However, it seems that traders were not quite sure on how to react to Yellen's words. The growth in rates allow us to expect higher returns for asset holders, but for issuers, the situation is exactly the opposite.
The Congressional Budget Committee published an interesting infographic about the state of the budget in 2020. The deficit was 3.1 trillion, or 14.9% of GDP. The deficit is covered by the growth of the national debt, which accelerated after the launch of urgent anti-COVID programs.
It is worth noting that it's only 2020. Everyone already knows what will happen to the national debt in 2021 – after the launch of the next stimulus packages, the debt will grow at a rapid pace. What resources will the US government use to service this debt if interest rates continue to rise? The government has no resources. The current account deficit as of Q4 2019 was 104.3 billion, and then rose to 188.5 billion a year later. The dynamics remain negative.
Biden intends to launch a new incentive package to maintain infrastructure, since there is simply no budget revenue for this purpose. The trade balance in March declined from -70.5 billion to -74.4 billion, and the commodity balance deficit is approaching 92 billion, and if domestic oil production continues to deteriorate, the deficit growth rate will increase.
Therefore, the US budget deficit is doomed to grow in the near future, which can only be covered by new loans. The higher the rate, the more expensive it is to service the public debt, and so, the Fed cannot raise the rate without threatening to provoke an acceleration in the growth of the budget deficit. It's a vicious circle.
The US dollar remains under pressure, but any movement in one direction or another will not have a fundamental justification before the publication of Nonfarms. In this case, it is needed to be patient.
USD/CAD
The Canadian dollar is still one of the most popular currencies among speculators in the futures market. The net long position is continuously growing, avoiding a failure. According to the results of the reporting week, the CFTC reports an increase of 217 billion, to 1.268 billion for the euro. The target price is sharply inclined downwards, so there are high chances that the USD/CAD pair will further decline.
As expected, the Canadian dollar is strengthening. The closest support level is 1.2246, where there will most likely be no delay. The target is 1.2050/70, where the middle of the long-term downward channel passes.
On Thursday, the Bank of Canada Governor Macklem will make a speech. By Friday, the report on Canada's labor market for April will be published simultaneously with Nonfarms. In contrast to the US, the forecasts are much less optimistic. We can assume that a pullback will occur after a strong growth of the employed in March (+303 thousand). It can be seen that the expectations for the US and Canadian labor markets are opposite, but the USD/CAD pair is looking down. This means that in case of deviation from the forecasts, the chances of a more pronounced downward movement will increase.
USD/JPY
On May 3 and 4, Japanese banks are closed due to the holidays, so the dynamics of the yen is determined by either long-term or external factors.
According to the latest CFTC data, the net short position is down by 1.338bn, that is, to -5.58bn, which may indicate the beginning of a reversal in favor of the Japanese yen. However, the dollar's edge is still quite strong, and the lack of short-term dynamics does not allow seeing the general direction.
The target price is still higher than the spot price. This is a weak bullish factor, but it is not enough to rely on the growth of the USD/JPY pair. An upward movement is still slightly more likely, but this conclusion follows solely from the favorable external background, pushing investors to buy risky assets. The long-term target is set at 1.1450/70. A decline is likely only amid clear signs of dollar weakening, which looks unlikely after Yellen's comments yesterday.
