The RBNZ left the rate at the current level of 0.25% at the meeting on monetary policy, famously refuting all forecasts (experts gave an 80% probability of a rate hike by a quarter-point. The formal reason is the recent outbreak of COVID-19, which prompted the government to declare a three-day nationwide lockdown, while the RBNZ took a hiatus until October.
The growing risks provoked demand for the US dollar, which showed growth in all directions. This growth is not provided by internal factors – the report on retail sales came out worse than expected, which indirectly indicates a slowdown in inflation. This means that it gives the Fed more space. The NAHB housing market index is also lower than forecast, and US stocks closed the day lower.
Today, the main focus is on the publication of the minutes of the FOMC meeting (18.00 Universal time). The demand for risk will remain weak, which gives an advantage to protective assets – the dollar, yen, gold, and bonds.
USD/CAD
The estimated price of the USD/CAD pair resumed growth, partly due to a slight reduction in the net long position of the Canadian dollar (a weekly decrease of 79 million to +516 million). This is somewhat due to a shift in the spread of bond yields in favor of the US Treasury last week. Apparently, investors are focused on the announcement of the Fed's QE curtailment at the September meeting, while the Bank of Canada's plans remains unclear.
If we compare the US and Canadian economies by the usual criteria, such as inflation, consumer demand, and the state of the labor market, then Canada's recovery looks even more convincing. The latest data confirm the rapid growth of spending in June and July. Almost 325 thousand new jobs were added in 2 months and another strong employment growth is expected in August, as the number of job ads is steadily growing.
As for inflation, a report for July will be published today at 12.30 Universal time. It is expected that the CPI will grow in July from 3.1% yoy to 3.4% yoy. This is slightly less than in the US, but above the target of the Bank of Canada.
Traditionally, the Bank of Canada is somewhat behind the Fed in changing monetary policy, so if the Fed starts to wind down the QE program in September, then the BoC will most likely immediately announce similar steps. In the meantime, expectations are in favor of the Fed, so the hawkish rhetoric of Cabinet members is pulling the dollar up across the entire spectrum of the market, and Canada is no exception.
It can be assumed that the USD/CAD will continue to grow. The target level of 1.2525 outlined a week ago has been reached, so the bulls will pull the CAD into the consolidation zone just below the previous high of 1.2805. This will be the main target in the next two weeks.
USD/JPY
The pace of Japan's economic recovery is again under threat. Preliminary data for the 2nd quarter indicate a moderate growth of 0.3% (1.3%yoy), which is approximately 96.6% from the level of Q3 2019, that is, the pre-pandemic level has not yet been reached.
The growth of real GDP was due to the recovery of domestic demand, which amounted to + 0.6% compared to Q1. Apparently, this driver was under threat again. On August 17, the Cabinet of Ministers of Japan extended the date of termination of the current state of emergency due to the cases of COVID-19 in 6 prefectures from August 31 to September 12 and extended it to 7 other prefectures. Accordingly, the expansion of restrictive measures will affect the reduction of already weak consumer demand.
External demand has made a negative contribution to the GDP structure. No improvements are expected for Q3. As a result, Japan may see negative GDP growth, which means that the probability of taking additional stimulus measures increases.
The yen's net-short position rose by 531 million, reporting to -6.857 billion. This is the weakest position against the US dollar among the G10 currencies. The target price is trying to resume growth.
The only driver that can strengthen the yen is an increase in panic sentiment around the world. Until this happens, the indicated currency will be under pressure. We expect the USD/JPY pair to return to the resistance level of 110.55, followed by an attempt to break through the range.
