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25.05.2020 11:06 AM
End of pandemic will not help the real economy; Overview of CAD and JPY

Monday is a holiday for banks in the United States and the United Kingdom; moreover, macroeconomic data are not expected to be published, which is likely to lead to a decline in activity and trade in the range

The coronavirus pandemic has fulfilled its role. Now, there is something to cancel the impending decline.

USD/CAD

The retail sales in Canada in March declined for the first time in 5 months, the decline was 10%, the highest in the history of observations and higher than in the United States. About 40% of retailers were closed, and even the growth of online commerce could not compensate for the decline.

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The CFTC report turned out to be negative, the net short position increased by $ 224 million to 2.514 billion, the fair price level, which takes into account, in addition to the CFTC data, the state of the stock market and the yield spread, changed little and has weak negative dynamics.

The current fair price level is slightly higher than the spot, which gives an impulse to growth, but it is blocked by the general direction of the estimated price down. In total, the position remains neutral, which means that factors contributing to the exit of the Canadian dollar from the range have not yet developed.

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The Canadian dollar continues to be very strongly dependent on demand for risk, practically not responding to internal data, and will follow the market in the event of a strong impulse. In the meantime, support 1.3845/65 remains relevant, the upper boundary of the range is slightly shifted down and is in the zone of 1.4050 / 70. There is no direction, trading in the range is relevant. On the other hand, the speech of the head of the Bank of Canada, Poloz, is expected in the evening, which may provide additional guidance.

USD/JPY

The Bank of Japan held an emergency meeting on monetary policy on Friday, at which it was agreed to launch a program of interest-free loans for small businesses. Following the meeting, a joint statement was made by Minister of Finance Taro Aso and the head of the Bank of Japan Kuroda, which in itself is a very rare event. The statement said the government and the Bank of Japan will coordinate efforts to support the business and financial market.

Why did you need such an extraordinary step? Probably, the depth of the economic decline in the 2nd quarter may turn out to be stronger than forecasted to the current moment. A comparison of the quick Consensus DI indicator (which tracks forecasts of stock market analysts working in research centers) with the dynamics of Nikkei 225 shows that the current level of the stock index is clearly overstated.

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Of course, the main reason for the strength of the stock market is that the Bank of Japan continues to buy ETFs. The continued use of public money to maintain stock prices provides short-term stability for the domestic economy, but leads to a separation from the real economy in the long run, which will ultimately affect the position of investors.

At the same time, the ratio of the market capitalization of the first section of Tokyo Stock Exchange to the nominal GDP declined below 100% for the first time in 14 months. The TSE index serves as a guide for the financial sector of the economy, and its decline may be a hint for further action by the Bank of Japan and the government. Aligning the situation with market reality implies either a sharp decline in Nikkei 225, which is equal to a rise in the price of the yen, or an improvement in the real situation in the economy. Obviously, the Bank of Japan and the government will try to implement the second option.

The expensive yen is too burdensome for the Japanese economy. Over the previous week, the total long position declined slightly, USD/JPY is expected to turn upwards. In any case, the estimated fair price has a slight upward trend.

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Most likely, the long-awaited exit from the range will occur. The resistance at 108 can be tested in the short-term, after which the yen will try to move further to the level of 109.35.

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