Markets await Powell’s speech. Overview of USD, CAD, JPY
October 19, 2023 3:23 am
Yields rise after strong US retail sales data: the yield on 2-year bonds has reached a 16-year high, and 10-year bonds are near multi-year highs at 4.88%. The Atlanta Fed GDPNow model in the third quarter of 2023 is 5.4%, significantly higher than the previous week’s level.
Federal Reserve Chairman Jerome Powell will speak before the Economic Club of New York on Thursday. Powell’s speech comes shortly before the quiet period ahead of the FOMC meeting on November 1, so what he says could influence market prices when the upcoming decision is made.
Powell will need to consider a series of strong economic data from the US. Core CPI inflation is showing signs of accelerating from a brief period of calm amid recent strong inflation in key services. The number of non-farm payrolls was very high, marking the fifth consecutive quarter in which GDP growth exceeded forecasts.
It’s worth noting that the vast majority of FOMC members believe that the risk of inflation remains elevated. They’ve had this position even before oil prices started rising, which means that the risks have not diminished. Businesses are also concerned about the possibility of slowing down the decline in inflation or even a resurgence, supported by the movement of 5-year TIPS (Treasury Inflation-Protected Securities), which closed at 2.3% at the end of Tuesday, matching the September 19th high.
On Wednesday, investors were focused on the eurozone inflation report.
USD/CAD
Canada has updated its inflation report for September. The Consumer Price Index fell to 3.8% on a yearly basis in September, down from 4% the previous month, and was largely due to the high base effect. The annual Core CPI increased 2.8%, compared to 3.3% in August. Nevertheless, the overall trend is positive. Softer inflation eases pressure on the Bank of Canada and reduces expectations both for the peak interest rate level in the current rate-hike cycle and for the duration of the period of high interest rates.
The Bank of Canada will convene for its next meeting on October 25, and there is a possibility that some of the hawkish language may be adjusted towards a more dovish stance. Market expectations changed rapidly: the probability of a rate hike has decreased from 45% to 15%.
The net short CAD position increased by 494 million to -3.423 billion during the reporting week, indicating a bearish positioning. The price is above the long-term average and is heading upwards.
USD/CAD is trading near the upper band of the channel, consolidating just below the local high of 1.3784. We expect the uptrend to remain intact, with the nearest targets at 1.3784 and 1.3860. Support can be found at 1.3550/70, and the pair is unlikely to fall from this level.
USD/JPY
The economic situation in Japan is challenging, but economic conditions show no signs of deterioration. Industrial production has been negative this year, and the Japanese government assesses the current situation as neutral (Japan’s Economy Watchers sentiment index stood at 49.9 in September). In the near term, the possible re-election of Fumio Kishida as the head of the LDP will influence the Bank of Japan’s policy. If Kishida announces his intention to serve a second term, potential actions will commence in January. Traditionally, the BOJ refrains from policy changes to avoid influencing election outcomes.
In other words, the complex process practically blocks any central bank action until January. The negative interest rate policy will not be terminated, and announcements on this matter are unlikely. Consequently, the main factor behind the yen’s weakness will persist for at least three more months.
The net short JPY position decreased by 1.2 billion to -8.362 billion over the reporting week. The bearish bias remains intact, and the price is above the long-term average and is headed upwards.
The threat of a decline doesn’t stem from fundamental factors but from the potential currency intervention by the Ministry of Finance, which is concerned about the yen’s low exchange rate, which makes imports more expensive and supports inflation. The threat of intervention will grow if it is found that the slowdown in inflation is too slow. September data will be released on Thursday. For now, there is no reason to expect a downward reversal of the yen, and the price continues to gradually move towards the 151.91 high.
The material has been provided by InstaForex Company – www.instaforex.com
Yields rise after strong US retail sales data: the yield on 2-year bonds has reached a 16-year high, and 10-year bonds are near multi-year highs at 4.88%. The Atlanta Fed GDPNow model in the third quarter of 2023 is 5.4%, significantly higher than the previous week’s level.
Federal Reserve Chairman Jerome Powell will speak before the Economic Club of New York on Thursday. Powell’s speech comes shortly before the quiet period ahead of the FOMC meeting on November 1, so what he says could influence market prices when the upcoming decision is made.
Powell will need to consider a series of strong economic data from the US. Core CPI inflation is showing signs of accelerating from a brief period of calm amid recent strong inflation in key services. The number of non-farm payrolls was very high, marking the fifth consecutive quarter in which GDP growth exceeded forecasts.
It’s worth noting that the vast majority of FOMC members believe that the risk of inflation remains elevated. They’ve had this position even before oil prices started rising, which means that the risks have not diminished. Businesses are also concerned about the possibility of slowing down the decline in inflation or even a resurgence, supported by the movement of 5-year TIPS (Treasury Inflation-Protected Securities), which closed at 2.3% at the end of Tuesday, matching the September 19th high.
On Wednesday, investors were focused on the eurozone inflation report.
USD/CAD
Canada has updated its inflation report for September. The Consumer Price Index fell to 3.8% on a yearly basis in September, down from 4% the previous month, and was largely due to the high base effect. The annual Core CPI increased 2.8%, compared to 3.3% in August. Nevertheless, the overall trend is positive. Softer inflation eases pressure on the Bank of Canada and reduces expectations both for the peak interest rate level in the current rate-hike cycle and for the duration of the period of high interest rates.
The Bank of Canada will convene for its next meeting on October 25, and there is a possibility that some of the hawkish language may be adjusted towards a more dovish stance. Market expectations changed rapidly: the probability of a rate hike has decreased from 45% to 15%.
The net short CAD position increased by 494 million to -3.423 billion during the reporting week, indicating a bearish positioning. The price is above the long-term average and is heading upwards.
USD/CAD is trading near the upper band of the channel, consolidating just below the local high of 1.3784. We expect the uptrend to remain intact, with the nearest targets at 1.3784 and 1.3860. Support can be found at 1.3550/70, and the pair is unlikely to fall from this level.
USD/JPY
The economic situation in Japan is challenging, but economic conditions show no signs of deterioration. Industrial production has been negative this year, and the Japanese government assesses the current situation as neutral (Japan’s Economy Watchers sentiment index stood at 49.9 in September). In the near term, the possible re-election of Fumio Kishida as the head of the LDP will influence the Bank of Japan’s policy. If Kishida announces his intention to serve a second term, potential actions will commence in January. Traditionally, the BOJ refrains from policy changes to avoid influencing election outcomes.
In other words, the complex process practically blocks any central bank action until January. The negative interest rate policy will not be terminated, and announcements on this matter are unlikely. Consequently, the main factor behind the yen’s weakness will persist for at least three more months.
The net short JPY position decreased by 1.2 billion to -8.362 billion over the reporting week. The bearish bias remains intact, and the price is above the long-term average and is headed upwards.
The threat of a decline doesn’t stem from fundamental factors but from the potential currency intervention by the Ministry of Finance, which is concerned about the yen’s low exchange rate, which makes imports more expensive and supports inflation. The threat of intervention will grow if it is found that the slowdown in inflation is too slow. September data will be released on Thursday. For now, there is no reason to expect a downward reversal of the yen, and the price continues to gradually move towards the 151.91 high.
The material has been provided by InstaForex Company – www.instaforex.com
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