The US Treasury yield declined, pulling the entire debt market. This happened after the Fed's Deputy Chairman, Richard Clarida, announced that the Federal Reserve is ready to start discussing the issue of reducing the pace of asset purchases at the next meeting. Clarida also said he had an extremely positive outlook for the US economy that the Fed would tighten policy faster than it currently expects if recent inflationary pressures, which central banks consider temporary, are likely to be more sustained than expected.
At the same time, there was no unified market reaction to such a vague statement. June gold futures broke through the $ 1,900 level per ounce for the first time since January. This is a clear factor in favor of the further weakening of the US dollar. In general, metals are growing by half a percent, the demand for risk remains stable, the trends are the same – a weak dollar and strong commodity currencies.
USD/CAD
The Canadian dollar has gained more than 4% against the US dollar since the beginning of the year and is the best among the G10 currencies. This growth is stimulated by at least two factors.
The first one is an increase in commodity prices. With global production accelerating, everything from lumber to oil is in high demand, and Canada is known to be one of the world's leaders in commodity production. The second is the Bank of Canada's more hawkish position, which supported the upward trend of the Canadian dollar. The bank announced at the last meeting that it is ready to raise rates when the economy reaches full capacity. And this exit is expected to happen earlier than in the US, which forces investors to quickly move to Canadian assets.
As a result, the yield of two-year T-bills in Canada is growing faster, and the USD/CAD rate is even slightly behind the yield growth, that is, the potential for further strengthening of the Canadian dollar remains.
The Canadian dollar remains one of the beneficiaries of the weakening US dollar. The CFTC report showed a continuation of the trend to increase the long position on CAD, which increased by 630 million to 3.822 billion during the reporting week. Thus, it can be assumed that speculators are waiting for a further decline in the USD/CAD pair. The estimated price is still below the long-term average, but there are early signs of momentum exhaustion.
The USD/CAD pair is declining near the middle of the channel. The target is a 6-year low at 1.1910 and there is a risk of a technical correction to the upper border of the channel, which is around 1.2250/2300, but what's more likely is a further decline.
USD/JPY
The short period of stabilization was replaced by another wave of selling of the Japanese yen. The net-short position increased by 1.46 billion, to -5.848 billion, that is, traders do not see the reasons for the strengthening of the yen, even amid the weakening dollar. The estimated price went slightly above the long-term average, which increases the chances of an upward exit from the range.
The yen remains largely a hostage to the political situation in the country. Some time ago, the idea of additional budgetary expenditures to combat COVID-19 in the amount of up to 30 trillion yen was actively discussed, but now this is no longer relevant – the discussion of the additional budget has been postponed until autumn. The government has about 4 trillion yen of unspent reserves, and the focus is shifting from supporting the economy to large-scale vaccination. Major Japanese political forces have concluded that vaccination will have a better effect than quarantine, taking the UK as an example.
It is not yet fully understood how all this will affect the yen. If the emphasis is indeed on vaccination, then the economy will grow faster when restrictions are reduced, which will increase exports and, as a result, will contribute to the weakening of the yen. At the same time, rising commodity prices due to lack of supply will strengthen the national currency, as Japan is one of the largest buyers of raw materials.
We presume that the Japanese yen continues to trade in a range. An upward exit, as the dynamics of the target price show, is slightly more likely. It can be assumed that there will be an attempt to update the local high of 109.80, but there is no reason to wait for a strong impulse yet.
