The Chinese Ministry of Commerce reported that Washington and Beijing agreed to hold the 13th round of high-level trade negotiations in early October. This news was received enthusiastically by the markets. Stock indices are traded in the green zone and Brent has returned to a level just above $60/barrel. Meanwhile, the demand for protective assets is decreasing. The trend does not look stable, taking into account experience from the past, but at the current stage, it will contribute to an increase in demand for risky assets until the end of the week.
USD/CAD pair
The Bank of Canada did not follow the global trend of easing monetary policy as the threat of recession grows, leaving the target of over-overnight rates at1.75%. In an accompanying statement, BoC drew emphasis between internal and external threats, noting that the likelihood of escalation of external threats remains quite high, primarily the trade conflict between the US and Canada. But for internal threats, they are controlled and generally consistent forecasts.
The bank explained that growth in the second quarter exceeded the July forecast, noted steady growth in exports, especially compared with the results of the first quarter. At the same time, there were positive dynamics in wages and housing construction and inflation in July were greater than expected.
With such strong indicators, the Bank of Canada did not find a reason to reduce the rate, although it warned that it would pay special attention to global changes. Also, there is no reason to believe that positive trends will be sustainable as the dynamics of production PMI clearly shows.
IHS Markit notes that business conditions are deteriorating, the volume of new orders has fallen sharply, the volume of exports has declined, and there has been a decrease in output since April. A strong drop in consumer demand and the fastest pace for more than 5 years of stockpiling in finished goods warehouses will inevitably support a downtrend at least in the coming months even if external conditions do not worsen. This means that the sustainability of internal indicators referenced by the Bank of Canada is on a rather shaky foundation.
The USD/CAD pair fell below the support of 1.3225, which suggests that another attempt at sales and testing support 1.3182. This scenario is supported, among other things, by the news of the resumption of trade negotiations between the US and China and the subsequent growth of oil but a steady trend is unlikely. The loonie will form the foundation before the next leap upward, and the whole scheme is only to understand where the base will be. There is potential for a decline to 1.3104, but only if trade talks between the US and China actually start, not just on Twitter.
USD/JPY pair
The conditions in which the Bank of Japan is placed have two significant differences from the conditions in which the Bank of Canada is located. Firstly, the Japanese economy is much more oriented to external conditions, and the demand for yen as a protective asset can significantly exceed the revenue of exporters. Secondly, the Bank of Japan has virtually no room to maneuver.
Yields on 10-year-old JGBs fell below - 0.295% during trading on September 4, just one tick above the historical low of 0.300% recorded on July 8, 2016. The comments of BoJ head, Kuroda, does not see the need for excessive restrictions, indicating that profitability may fall further and widening the gap between the market rate and the target rate. Accordingly, it will be pointless to maintain the target yield near zero in these conditions, but at the same time, the central bank will be obliged to resist the strengthening of the yen by all means. How he intends to do this remains a mystery.
On Thursday morning, the yen goes into the lateral range as the tension eases. The upper limit of the range 106.78 may not resist if new positive data appear along the US-China line, and growth is possible to 107.45. Otherwise, a return to the lower border of 105.60 is inevitable.
