The S&P 500 closed yesterday at a new all-time high of 3,389.788, with just 126 days since the previous peak on February 19, which is the fastest recovery of a bear market in history. Growth from the low of 2191 on March 23 was 54.7%; yesterday, the positive dynamics was supported by strong data on housing and the hope of a new package of economic support after the Speaker of the House of Representatives Pelosi said she was ready to compromise on incentives in January, that is, after presidential elections.
Meanwhile, the dollar will not get out of a prolonged peak in any way. The decline continued after a short period of consolidation. The reasons are known - the weak pace of the US economic recovery, lower profitability of American financial instruments, excess liquidity and a general decline in stress due to the coronavirus, supported by expectations of new vaccines.
At the same time, the sustainability of the demand for risk remains questionable. US President, Donald Trump, has postponed trade negotiations with China because he "does not want to deal with them now." The United States is increasing pressure on partners to limit the expansion of Chinese tech companies. Apparently, Trump needs the tension in order to look more confident in the eyes of voters ahead of the November elections.
On the other hand, large banks do not have a single view on the further dynamics of the dollar. Scotiabank believes that the consolidation period will be short and it can be expected to weaken another 3-5% over the coming weeks. Nordea predicts that "popular QE", i.e. digital currencies, will enter the scene and continue to stick to a short position on EUR/USD, believing that an exit above 1.1950 is unlikely. DanskeBank, in turn, expects US yields to rise and the dollar will rise in autumn, in particular USD/JPY above 107.
The main reason for the dollar's weakness is apparently political. The refusal of the Republicans to consider the option of the Democrats on the package worth $ 3 trillion deprives the dollar of competitive advantages amid active actions of the ECB and a number of other central banks.
USD/CAD
The net short position in the Canadian dollar has not been liquidated, despite the positive trend since the end of May. The Canadian currency has sold off for the second week in a row, the short position has grown by 0.48 billion and reached 2.221 billion. The target price did not even go above the long-term average, but the trend is evident - USD/CAD pair is preparing to form a bottom and a reversal up.
The resignation of the Minister of Finance of Canada at the beginning of the week had no effect on the CAD, so a political crisis is unlikely. The bearish impulse in USD/CAD is still strong, technically the decline is justified up to support 1 2956, but the beginning of the reversal of financial flows suggests that the support will withstand, and the Canadian dollar begins to form a bottom. The nearest support is 1.3128, buying is justified when signs of a reversal appear with the target at 1.3350 / 50.
USD/JPY
The net long position in JPY declined by 0.545 million over the reporting week, the dynamics in line with the overall decrease in tensions. The yen is one of the few G10 currencies that failed to renew its high against the backdrop of the dollar's decline. The settlement price is trying to break away again from the long-term average, which gives the chances for the USD/JPY to rise.
The Japanese economy continues to experience severe problems. Growth of Industrial production in June was only 1.9%, orders for engineering products declined by 7.6%, an annual decline of 22.5%, and there are no signs of improvement in the situation. Despite the persistent myth that during times of crisis, Japanese investors repatriate capital, in reality, everything is strictly the opposite – there is no place to withdraw the yen, since carry-trade transactions that were previously financed in the yen are no longer relevant, and the state of the Japanese economy is such that it is extremely difficult to find tools for investment.
If there is no sudden increase in tension, the yen will continue to weaken. Growth to the middle of the channel 106.25 / 40 is justified and we expect further resistance of 107.03 and 107.40/50, movement to them is likely if the dollar begins a strengthening phase.
