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FX.co ★ Groundless caution leads to a rise in demand for the dollar and yen. Overview of the currency market

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Forex Analysis:::2021-07-16T07:05:14

Groundless caution leads to a rise in demand for the dollar and yen. Overview of the currency market

There is a tendency to abandon risks on Friday morning. Oil and commodity currencies are declining, while gold and protective currencies are rising. At the same time, yields are declining, with the 10-year UST returning to the level of 1.3%, which indicates the disappointment of investors.

It is possible that the caution is explained by the noticeable dovish tone of Fed Chairman Powell's speeches in the US Congress. On Wednesday, Powell announced that the economic recovery is not yet convincing enough to start reducing quantitative easing. The financial conditions created by central banks in response to the pandemic are much softer than after the 2008 crisis, and the growth of the US stock market is significantly ahead of the similar growth of both developed and developing economies.

Groundless caution leads to a rise in demand for the dollar and yen. Overview of the currency market

Powell also confirmed that inflation is likely to remain high in the next few months, but temporary factors are still to blame for this.

It is not surprising that immediately after Powell's speech, UST yields decline as the probability that the Fed will take some steps to tighten monetary policy in September has become less. As a result, the pressure on the US dollar may increase.

If there is a phenomenon, then there must be reasons for it. One of them is the sharp spread of the Delta strain, which increases the risks for global recovery. Second, global growth was quite rapid until recently, which was explained by a low base. This factor is becoming less strong as the recovery continues. Third, there are concerns that some central banks may tighten policy too soon. This week, the Banks of Canada and New Zealand held their meetings, following which certain conclusions can be drawn.

The RBNZ expectedly kept its rate at 0.25% on Wednesday, but announced that it would stop buying bonds as part of its LSAP program starting next week. And although the regulator avoided more accurate forecasts for the rate and did not name the timing, the market reacted quickly. It sees a 70% probability that the rate will be raised next month. The main reason for this haste is called not only the pace of recovery but also the growth of inflation, which has already reached a 10-year high.

Groundless caution leads to a rise in demand for the dollar and yen. Overview of the currency market

It is interesting that even such a strong driver did not lead to an increase in the NZD, which continues to consolidate near the psychological level of 0.70. It can be assumed that as soon as the demand for risk returns to the markets, the New Zealand dollar will rush up, paving the way for other commodity currencies.

The Bank of Canada has already reduced the weekly pace of buying government bonds, which was expected. Moreover, it is predicted that there will be another decline in October, up to the complete cessation of purchases. Despite the fact that the BoC head, Macklem, gave very evasive answers to questions about the rate, the futures market assumes that the rate increase will begin in the first half of 2022.

In this case, we see two opposite trends that rely on the same data, but lead to different results. A number of banks are starting to wind down stimulus programs, while on the contrary, the Fed is trying to stretch QE as long as possible even though the US stock market has formed an obvious bubble, and the longer it is pumped up with cash, the stronger the rumble will be when it bursts.

Today, the trend is unlikely to be changed. There will be few important publications (inflation in the eurozone, retail sales in the US), but they are unlikely to change the general mood. Avoiding risks will lead to an increase in demand for the US dollar, so it is likely that the USD/CAD pair will move to the zone of 1.2640/50 and the NZD will most likely hold above the level of 0.70 to look for an opportunity to start rising.

In turn, the upward correction of the EUR/USD pair may meet resistance at the upper limit of the short-term channel 1.1830.40, after which sales may resume. We expect an attempt to update the local low of 1.1770. The pound has no obvious reasons to leave the consolidation zone, while the yen can try the strength of the recent low of 109.55 amid a decline in demand for risk.

Analyst InstaForex
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