US consumer confidence improved in June, as it rose to 109.7 this month, the highest reading since January 2022, from 102.5 in May. Consumers' assessment of current business and labor market conditions rose to 155.3 from 148.9. The board's expectations index — a measure of consumers' six-month outlook for income, business and labor conditions — climbed to 79.3 this month from 71.5 in May.
New home sales rose 12.2% month-over-month, the highest level since February last year, and compared to an expected decrease of 1.2%. Durable goods (preliminary) orders also exceeded estimates, showing a 1.7% increase in May against the expected 0.8%.
The U.S. housing market was one of the first sectors to suffer from the Federal Reserve's aggressive policies, but now it is rising again. Manufacturing is still in recession, but the services sector continues to grow modestly, and the decline in inflationary pressures is not yet evident.
Overall, the data supports the expectation that the Fed will continue its rate hikes. Since the Fed sees reducing consumer demand as the main factor in managing inflation levels, it can be concluded that the chances of a rate hike in July have increased rather than decreased, providing additional support for the dollar.
At the conference in Sintra, Portugal, the European Central Bank maintains a hawkish stance. ECB President Lagarde warned that wage growth would support inflation, and the market should avoid expectations of a quick policy pivot, suggesting that the Bank may intend to keep rates at their peak for longer. Interest rate derivative markets have not changed significantly and already largely account for a 25-basis-point increase in July and an overall tightening of 50 basis points. So far, news from Sintra allows the euro to maintain its position against the dollar, despite the fact that the dollar is strengthening against most other currency pairs.
USD/JPY
Japan's consumer prices, excluding those for fresh food (the Bank of Japan's preferred indicator), decelerated 3.2% from a year ago. This shows the impact of a reduced levy on electricity prices rather than a change in inflationary trend. A measure of inflation that also excludes energy reached 4.3% (previously 4.1%). The reading was the highest since 1981.
Therefore, underlying price pressures continue to gain strength, and this is a clear sign of its sustainability. In addition, one of the key factors in maintaining core inflation is the extent to which wage increases will have an impact. A number of large companies are raising employee wages by pegging increases to inflation, i.e., making them consistently high.
The BOJ maintained its ultra loose monetary policy. For the current 2023 fiscal year, Japan's central bank said it expects core CPI to hit 1.8% in its latest quarterly forecast. It is likely to be revised upward in the next quarterly forecast on July 28.
Opinions regarding whether the BOJ will tighten its monetary policy at the July meeting are quite opposite. For example, Danske Bank expects active measures, if not in July, then in September, and expects USD/JPY to be below 130 within a 6-month range.
On the other hand, Mizuho Bank, after analyzing the minutes from the June 16 meeting, came to a different conclusion and sees no signs of increasing momentum for reviewing the yield curve control (YCC) at the July meeting. Bond market functioning has notably improved, and the BoJ will maintain its pause because "...the price of waiting is low." Japan has been fighting deflation for many years, so it will simply wait for global inflation to decrease.
The net short position on JPY increased by $243 million during the reporting week, reaching -$9.512 billion, with positioning remaining bearish. The calculated price is above the long-term average and is pointing upwards.
As expected, the yen broke above the 142.50 resistance, leaving the channel, and now there's a high chance it could move towards the 151.96 high. Take note that the yen's depreciation at the end of last year forced the BOJ to intervene and revise the range of yield curve control. The situation is different now, so further USD/JPY growth can only be stopped by a change in the global market with a sharp increase in demand for safe-haven assets or the BOJ's intervention. We expect succeeding growth.
USD/CAD
Inflation in Canada decelerated to 3.4% in the year up to May from 4.4% the previous month, while core inflation dropped from 4.1% to 3.7%. Market confidence in the Bank of Canada's rate hike path has fallen. However, it is still too early to draw conclusions as core inflation remains too high to expect the Bank to deviate from its planned tightening. In April, the Bank of Canada projected a summer inflation decline to 3%, and inflation has not yet reached that level.
The net short position on CAD decreased by $219 million during the reporting week, reaching -$2.534 billion. Although positioning remains bearish, the trend of reducing short positions that started in April continues. The calculated price is below the long-term average and is pointing downwards.
We expect the USD/CAD pair to fall further, with the target being the lower band of the 1.3040/60 channel. The upward retracement to the 1.3225 resistance took place, and we expect the pair to revive its downward movement from current levels. There is little basis for a more pronounced growth, with the nearest resistance at 1.3260/70.
