As expected, US consumer inflation rose more strongly in December than in November – from 0.2% m/m to 0.4% m/m, an annualized increase of 1.4% against 1.2% a month earlier, which was even higher than the forecast of 1.3%. The dollar received additional grounds for strengthening, as stronger inflation means, among other things, a faster approach to the normalization of the Fed's monetary policy.
After the publication of inflation data, most stock indexes in Europe went into the red zone, oil is declining, the price of gold and bonds are rising. The reversal in favor of protective assets is not yet stable, but we must assume that in the coming days demand for the dollar will grow, but risky assets will be under pressure.
The Bank of Canada released a quarterly survey on the business climate in Canada, which by most parameters confirmed the trend of a gradual recovery in the fall after the failure in the first half of the year. Business sentiment has improved, with most firms reporting an increase in investment plans and the labor market, but there are a few circumstances that negate the positive changes. Firstly, it is expected that inflation will not rise to 2% in the next 2 years, which indicates disbelief in the recovery of demand, and secondly, sales growth in the 4th quarter, when all restrictions were lifted, still turned out to be at the level of the crisis of 2008/09.
Since March last year, the Canadian dollar has been in an impressively confident strengthening trend, however, there is a likelihood that this trend is ending. The estimated price twice during this time, in August and September, made attempts to turn up, but the corrections were shallow. Now we are seeing the third attempt, the estimated price goes above its long-term average, although technically there are still no signs of a reversal at the moment.
The probability that a long-term low was formed on January 6 is growing. If the CFTC report on Friday shows a decline in the long position on CAD, which as of January 5 was quite impressive at 1.146 billion, it will give additional arguments that the reversal has already taken place.
Hence the conclusion – you can try to enter long positions with an eye on 1.31, stop below 1.2625.
The yen is likely to resume strengthening against the background of growing concern that the growth of raw materials can slow down or even stop in the coming weeks that will reflect the growing demand for risk.
Mizuho Bank notes that copper futures went down sharply on the London Metal Exchange, and connects the fall in prices with the growth of the coronavirus threat in China. China was able to suppress the virus early with a tight lockdown and reopened its economy faster than the US or Europe, but recent news indicates that a new outbreak is possible in China.
Chinese authorities are seeking to conduct a large-scale vaccination program before the Lunar New Year, but there may not be enough time, and therefore an alternative way to contain the epidemic will be launched - a strict lockdown of cities. If this happens, a reversal in commodity prices will be inevitable.
The yen's target price has long been poorly informed as the USD/JPY has been declining for several months due to the dollar's weakness, even with rising commodity prices. But over the past few weeks, there has been a steady rise in the long speculative position in futures, which should also work on the spot.
If the Japanese authorities do not dare to intervene, then USD/JPY will continue to decline due to risk aversion. As long as the yen is above the March minimum, intervention is unlikely, therefore, short selling with the target at 102.60, stop at 104.50 is justified, in case of a downward movement, the target will shift to 101.20. It is dangerous to predict a deeper decline due to the fact that the Bank of Japan will most likely be forced to intervene in order to prevent the yen from strengthening below 100.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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