On Friday morning, markets continue to trade in the green zone, playing a positive from several directions at once. The ECB spoke more optimistically than predicted. Mario Draghi expressed confidence in raising inflation to the target level and not giving any hints about the possibility of a new phase of quantitative easing. Mexico is ready to give in to US pressure, which led to the possibility of a pause in the maintenance of new tariffs. Meanwhile, Trump will make a decision on China only after the G20 summit, where direct negotiations with PRC head X will be held.
The US trade deficit fell slightly in April. However, the dynamics continue to be negative as the balance is kept from falling only by reducing oil and oil products to almost zero in the overall import structure. Minus this figure, the overall balance is confidently moving in the direction of about one trillion dollars per year and no emergency measures by the Trump administration to increase the revenue side by increasing incoming tariffs have no effect.
The incoming data on the labor market indicate that it is not necessary to expect positive figures in the May report today. Meanwhile, the number of new and repeated applications for unemployment is not decreasing and the ADP report turned out to be a failure. As for the final data on the cost of labor in Q1, it turned out to be worse than the preliminary ones. Everything points to the fact that the state of the labor market at least does not improve and any negative will add points to the piggy bank of bears waiting for two cuts in the current year due to the rapid cooling of the US economy.
The situation in the manufacturing sector in Canada continues to deteriorate. The PMI Markit index in May fell from 49.7p. to 49.1p, reaching the lowest value in the last 3.5 years.
Production is declining against the background of the sharpest drop in new orders since December 2015. The growth in prices for raw materials has slowed to the lowest level in the last 4 years. Markit attributes the fall in the index to the deterioration in world trade since the decline in oil prices in the reports has not yet been reflected, which in turn, suggests that the result of June may turn out to be even worse.
The Canadian industry is experiencing the negative impact of the new tariffs, which were pushed through by the United States as part of the "renewal" of relations with Canada and Mexico in return for the NAFTA agreement. New tariffs have increased the costs of manufacturers, which ultimately affects the deterioration of the output conditions for buyers and reduced new orders. The latest data indicate a deterioration in the business environment in all the regions where the survey was conducted.
Meanwhile, the Ivey index, which tracks activity in all sectors of the economy, remained at the same level of 55.9p in May. This indicates growth in other sectors of the economy, primarily in the services sector. The Bank of Canada will hold its monetary policy meeting only in a month. They did not announce the possibility of reducing the rate from the current 1.75%, thus, there is no direct threat to the loony from this side. Rather, we need to monitor the dynamics of oil prices and the state of the labor market. Today, the May report will be published simultaneously with the US report. The forecast is neutral but a slight increase in the number of employees is expected. Hence, the response of the Loonie will depend entirely on US data.
The USD/CAD pair is in a downtrend and the likely increase to 1.3380/85 can be used for sales with the target of 1.3280/90.
The Japanese yen has expectedly strengthened since the end of April, as the growth of panic attitudes caused by the complications in the US-China trade negotiations led to an increase in demand for defensive assets. Macroeconomic data is generally not in favor of the yen as the household spending in April fell to 1.3% y/y and the average wages fell by 0.1%. Both indicators indicate that chronic problems with inflation are far from being resolved.
At the same time, the decline in oil prices will strengthen the position of the yen and support the falling Nikkei and the weakening this week is likely to be short-lived. The USD/JPY growth is limited by the channel border at 108.90/109.05. Probably, the resumption of decline with a view to 107.00 / 20 since there are still no objective reasons for the decline in demand for protective assets.
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