The temporary US inflation growth to 5.4% y/y in June against the forecasted 4.9%, put Fed Chairman J. Powell, who will start his two-day speech in Congress today, in a difficult position. The first comments of the Fed members were inconsistent and contradictory. The CEO of the Fed San Francisco, Daly, called the current surge in inflation temporary when interviewed by CNBC. At the same time, Kaplan said in an interview with MNI that he had revised his forecasts in a hawkish direction. Today, Powell will express his position.
Regardless of Powell's comment, there is no doubt about two points – first, the real yield of the US dollar is declining, which may not turn financial flows in its favor, and second, the markets react with the growth of the US dollar, as they hurriedly revise the rate forecasts in favor of an earlier start of the increase. Yesterday, the yield on TIPS bonds increased, and this growth will most likely continue today.
Accordingly, any hasty word from Powell tonight can dramatically increase volatility.
Today, the Bank of Canada is holding a regular meeting. It is expected to announce that the volume of asset purchases will be reduced. The forecasts are quite confident, which are based on a good pace of recovery of the labor market – hiring of new employees has reached a record level and consumer expectations are confidently high. In addition, households are expected to increase their spending by 4.1% over the next 12 months, which is close to the maximum of the study and almost double the expected income growth of 2.1%.
Hence, the positive expectations from the BoC meeting. The markets are not reacting yet, but there are high chances of strengthening the Canadian dollar by the end of the day.
CAD's net long position declined by 389 million to 3.305 billion over the reporting week. Its advantage is still significant, which most likely reflects expectations on both commodity prices and the pace of economic recovery in Canada, but the rising impulse has noticeably weakened, and there is almost no dynamics. The estimated price is higher than the long-term average, so we have an upward direction.
The corrective bullish momentum has weakened. The target of 1.2630/60 has not yet been reached, which leaves a chance for a continued upward correction. If the BoC gives a bullish comment today or changes the macroeconomic forecasts (forecasts in this regard are neutral), then a move to the level of 1.23 is not excluded.
The sell-off of the Japanese yen on the futures market has stopped. Its weekly correction of the net short position was +93 million, to -7.812 billion, which is a purely symbolic correction. The bears' preponderance on the yen is still very large, but there were no uniform dynamics. The estimated price is slightly higher than the long-term average, which hints at the continuing growth, but the direction is inclined downward.
Most likely, the yen will continue to trade within a wide range, but there is a chance that the USD/JPY pair will still decline. This will happen if the forecasts for the pace of recovery of the Japanese industrial sector are realized. The latest data is positive – orders for equipment are growing for the third month in a row, while the main demand comes from abroad, which increases the income of exporters. The income of exporters is the most obvious factor in managing the yen exchange rate, since the higher the income, the more currency exchange earnings and the more purchases of the yen, which negatively affects the exchange rate.
So far, these are just assumptions, but a few points should be noted. The Cabinet of Ministers raised the assessment from "recovery after a pause" to "improvement". It forecasts growth of 2.5% q/q in the 2nd quarter. Moreover, the Tankan report showed that enterprises expect an increase in fixed capital investment by 11.5%. A sharp increase indicates a repositioning in anticipation of recovery after the pandemic.
If these expectations come true or at least a movement in this direction is indicated, the Japanese yen will begin to strengthen. It is necessary to wait until investors start buying assets. In the meantime, we expect a return to the former lower border of the range of 110.80/90 and a weak attempt to return to the range.