Another tweet of US President Trump provoked a surge of enthusiasm in the global stock markets. Nikkei is growing at 0.86% as of 7.00 UTC+ and Shanghai Composite is adding 0.75%. The European stock exchanges also opened in the green zone.
Trump announced the postponement of the introduction of new duties in the amount of $250 billion for 2 weeks from October 1 to October 15. This gesture hardly means "goodwill," rather, it merely helps prepare the ground for new pressure after China softens the positionTrump explained, Trump explained. In turn, China announced the exemption from additional duties of 16 types of American products.
It is unlikely that the surge of enthusiasm should be overestimated. The parties have repeatedly stated their readiness to soften their position, but have not yet reached concrete results. Nevertheless, one should take into account the fact that a decrease in tension, even on paper, contributes to an increase in demand for risky assets, which supports commodity currencies.
Events such as the resignation of adviser to Trump Bolton and rumors that Trump is ready to consider the possibility of easing sanctions against Iran contributed to lower oil prices and put pressure on commodity currencies, including the Canadian dollar, since easing sanctions automatically means an increase in supply.
The latest news from the oil market has helped stop CAD strengthening
Meanwhile, Canada's own macroeconomic indicators are still quite confident. The labor market report for August turned out to be strong given that the growth in the number of employees significantly exceeded forecasts. At the same time, the average hourly wage level of 3.78% y/y allows us to count on stable consumer demand. There has been an increase in residential construction activity in the second quarter. Also, the utilization capacity in production has increased from 81.1% to 83%, and the Ivey business activity index has risen to a 10-month high of 60.6p.
Loonies went into the side range. While there are no clear signs of a weakening economy, therefore, it is not expected that the Bank of Canada may launch an incentive program in the near future.These factors support the Canadian. At the same time, the demand for risk does not look steady. So while the loonies will be trading above the recent low of 1.3132, there is little chance of overcoming resistance at 1.3228.
On Thursday morning, Mizuho Bank published the results of an extensive study, which reflected the expectations of investors regarding the immediate actions of the Bank of Japan and the prospects for interest rates.
The results, if not discouraging, then quite accurately indicate a change in expectations. According to forecasts, the rate on 10-year bonds will fall to -0.35%. Rates in other countries will decrease even faster, which will lead to a stronger yen in the next 1 to 3 months if you start from current levels.
The share of investors expecting the Bank of Japan to mitigate monetary policy has risen sharply. If in 2017/18, there was a slight advantage in favor of tightening the policy, then the latest data indicate a strong consensus in favor of easing.
At the July meeting, the Bank of Japan did not dare to introduce new measures but directly indicated its readiness for such measures in the event of a loss of inflationary momentum. Already after the BoJ meeting, it turned out that the Tokyo price index fell from 0.8% to 0.7%, and the national index fell from 0.7% to 0.5% y/y.
Mizuho expects the Bank of Japan to launch a policy easing program at an early meeting. These expectations, as well as a general increase in enthusiasm amid the resumption of negotiations between the US and China, contribute to the sale of the yen. In turn, the USD/JPY pair may rise to 109.30 before the end of the week. Here, the yen can find quite strong resistance (200-day SMA and previous local maximum). Therefore, to continue the growth, a real result from trade negotiations and a positive market reaction to the outcomes of ECB and Fed meetings will be required.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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