The latest data from the US support the hawkish attitude of the Fed, as it signals a steady economic recovery. Retail sales in April increased by 0.9%, which is close to the forecast (1.0%), and sales excluding cars increased by 0.6%, which is slightly higher than the forecast (0.4%). However, the revisions were very strong: the March data now show an increase of 1.4% (the previous 0.5%), that is, the data as a whole hint at a further increase in inflation. Industrial production also turned out to be much higher than expected, increasing by 1.1% m/m in April.
Fed Chairman Powell repeated his hawkish remarks, noting that inflation should decline convincingly and there may be "some pain, as economic growth must decline for inflation to decrease."
The correction in USD is explained by the growth of expectations for the ECB rate, however, the current pullback should not be considered a reversal of the weakening of the dollar. The dollar, without any doubt, remains the market's favorite at this stage.
USDCAD
The Bank of Canada's position remains hawkish. Tony Gravel, deputy head of the BoC, said last week that the improvement in the financial situation of households and the accumulation of significant liquid assets may give grounds for raising the rate above the neutral level since the economy is quite capable of withstanding this additional pressure.
Today, data on consumer inflation will be published, it is expected that it will remain at the same level of 6.7%, if the forecast is justified, this will give the Bank of Canada a little more space to react.
According to CAD, a net short position of -415 million was formed, a weekly change of -1.118 billion, positioning on the CME should be considered bearish for the Canadian dollar. The estimated price goes up.
The most likely scenario is that USDCAD will continue to grow. Perhaps support will be found at the current levels (23.6% pullback), a deeper decline is less likely, we expect a resumption of growth, the target is 1.3335. The Canadian dollar relies on stronger macroeconomic indicators than the USD, and if it were not for fears of an approaching financial crisis, it would strengthen against the dollar. However, we must proceed from the fact that the demand for the dollar is growing in the face of a decrease in liquidity. This is a technical aspect, so the Canadian is under additional pressure.
USDJPY
This morning, the Cabinet of Ministers of Japan published the first preliminary estimate of GDP for the 1st quarter. Real GDP decreased by 0.2% q/q (-1.0% y/y), this is slightly better than forecasts, but in any case, a reduction, not growth. The main negative contribution was received due to a reduction in external demand.
More important is the reduction in real gross national income, defined as real GDP plus profit from the trade and net income received from foreign sources. Its decline indicates a negative trend in the current account and a decrease in the foreign trade surplus.
On May 12, the Bank of Japan published a summary of opinions on the results of the monetary policy meeting held on April 27 and 28. It draws attention to an attempt to explain the recent surge in inflation by rising energy prices, which are quoted in dollars, and not the weakening of the yen. In other words, if the growth of oil stops and it remains in the current range, then the growth of inflation expectations, according to BoJ officials, will also slow down. This explanation gives the Bank's position on the current monetary policy - the protection of the 10-year bond yield target at 0.25% will continue, no matter what, which means that the liquidity flow will remain. This is a factor in favor of further weakening of the yen.
The bearish mood of speculators, according to the CFTC, is not in doubt, for the reporting week the net short position increased by 903 million and reached -10.58 billion.
The momentum has lost its strength, so consolidation may develop into a deeper correction to 124.10/40, however, the divergence of the policies of the Fed and the Bank of Japan is so great that any downward pullback will be used for new purchases, the long-term goal is still 135.19.
