The slowdown in annual inflation to 1.8% in May versus 2.0% a month earlier, which did not surprise the markets who are preparing for the fact that the Fed will begin the stage of lowering the rate this year. The base index slowed down less pronouncedly from 2.1% to 2.0% but the trend is still visible, despite the fact that the correction that has been going on for two months on the oil market is still not reflected in inflation figures.

The slowdown in inflation-protected TIPS 5-year bonds indicates that a negative trend may develop.

The Treasury's monthly report on the state of the budget was worse than expected in May with the deficit amounted to $208 billion and the assessment of the Budget Committee of the Congress on the state of the budget for the first 8 months of the current fiscal year was even more negative. The accumulated deficit amounted to 738 billion, which, while maintaining the current growth rate of the deficit will lead to the fact that by the end of the year the deficit could exceed 1.25 trillion.

Trump's protracted customs war gave the budget an increase of only 19 billion, which is unnoticeable amid a reduction in tax revenues. It is clear that the goal of this war is just a banal battle for control of sales markets. Trump calls on the Fed to help him and in addition to the trade war to unleash a currency war, that is, to the maximum extent possible to weaken the dollar. This is what goes. There are very few internal resources to save a strong dollar.

USD/JPY pair

The Macroeconomic data published this week on the state of the Japanese economy are contradictory. The growth of bank lending in May to 2.6% y/y indicates a revival in consumer demand, as evidenced by GDP growth in the first quarter by 2.2%. At the same time, EcoWatchers indexes, which assesses regional trends, fell in May to the lows of 44.1p for 33 months in the current situation compared to the forecast of 45.6 p based on forecasts. The preliminary report on orders for engineering products in may shows a drop of 27.3% YoY, which is the minimum since November 2016, and the trend remains clearly negative without any signs of improvement.

Exports are the key to the growth of the Japanese economy in the face of declining population, therefore, reducing orders for engineering products also means a threat to exports. At the same time, the increase in VAT scheduled for autumn creates a threat to the growth of domestic demand. The share of declining positions in the inflation basket decreased from 54% to 33% since Kuroda was appointed as the new manager of the Banks of Japan and introduced a negative interest rate in March 2013.

The balance of the Bank of Japan has grown over this time to 100% of GDP, which is noticeably higher than 20% for the Fed or 40% for the ECB. In order to keep the yield curve under control, the Bank of Japan is forced to increase its balance automatically by 30 trillion yen per year. Thus, investors do not expect any tightening measures from BoJ. Only after assessing the VAT increase in October possibly changes in rhetoric.

In the previous review, we predicted the movement of the yen to support 107, but the yen was trading sideways and found no reason to strengthen against the background of weak macroeconomic data. Nevertheless, the yen looks stronger in conjunction with the dollar. Therefore, a slow decline of 107.80 with a subsequent break down looks more likely.

USD/CAD pair

Loonie strengthened even somewhat stronger than expected, reaching the support of 1.3250 and even the subsequent noticeable rollback to 1.3345 did not change the trend. The Canadian is supported by the stabilization of oil prices and growing market confidence that the Fed will confirm a policy of easing monetary policy at a meeting on June 18-19.

The last factor in the current conditions is decisive since it leads to an increase in expectations for consumer demand. Stock indices are responding with growth, which among other things, points to hopes of restoring world trade.

We should expect another attempt to test support for 1.3250, which can be successful if the Fed officials do not change the direction of their speeches in the coming days.