Europe's introduction of new coronavirus restrictions had a negative reaction in the market. European stock indexes fell deeper into the red zone. Moreover, global yields sharply declined, in particular, the US Treasury (UST) fell back to 1.6%. May Brent futures also slip by almost $ 60 per barrel.
In this case, it is unlikely that demand for risky assets will continue in the near future. So, the main demand for the US dollar will remain.
USD/CAD
The Canadian dollar was one of the few currencies that barely fell against the US dollar in the futures market. Based on the CFTC report, the net long position declined by 44 million, to 824 million, that is, the advantage is still evident. The yield on Canadian Treasury changes almost together with the yield on the US T-bills, which means that the Canadian dollar does not experience pressure. As a result, the estimated price is still below the long-term average, and the Canadian dollar is the only commodity currency that retains the potential to strengthen against the US dollar.
The strong position of the Canadian economy is the reason for such optimism. The Bank of Canada presented updated recommendations, which argued for a gradual curtailment of stimulus measures.
It can be recalled that the BoC predicted GDP growth in Q4 2020 by 4.8%, which actually came out to 9.6%. As for the first quarter of 2021, BoC predicted a decline of 2.5%, but growth was recorded to 4-5%. As a result, the output gap is closing faster than the Bank of Canada expected, and the recovery of GDP lost due to the pandemic may occur by the summer, which means that stimulus measures are becoming redundant.
Moreover, the Bank of Canada is expected to reduce purchases in April from $ 4 billion to $ 3 billion, and to stop them completely by the end of the year. It is also planned to stop purchases of municipal bonds until May 7, the corporate bond purchase program will end until May 26, and operations to provide additional liquidity under the repo program will end until May 10. All these measures are economically justified, but they will somehow reduce the amount of liquidity provided, which will be a clear bullish factor for the CAD.
From the point of view of technical analysis, the USD/CAD pair continues to have a bearish trend, but there is a high probability of a technical correction due to the rising uncertainty. A weak growth to the resistance zone of 1.2870/2900 is likely, but if the risk demand returns to the markets, the Canadian dollar will resume pressure and the pair will test the low of 1.2356.
USD/JPY
Japanese yen's bullish position was entirely cancelled during the previous week. A net short position of 4.5 billion was formed, and sales amounted to 5.265 billion. The estimated price goes vertically up, which indicates a very strong bullish mood.
The inflation expectations of the Fed and the Bank of Japan are very contrary. After the March 16-17 meeting, the FOMC released the latest forecasts of economic and interest rates, with the balance of risks to the inflation outlook shifted upward. At the same time, the Bank of Japan said in January that the risks are shifted downwards. Based on this logic, we must assume that the real yield of UST is lower than the nominal one, and Japanese securities are higher. Consequently, Mizuho Bank stated that investors in the bond market are more confident in buying bonds in Japan than in the US, which is a bearish factor for the yen.
The inflation situation in Japan has remained stable for many years. On March 17, the Consumer Affairs Agency published a review of price monitoring, which suggests that the downward trend may or may not be coming to an end.
It is worth recalling that inflation declined by 0.4% y/y In February, which is worse than the forecast of 0.2%. In any case, consumers are not worried about inflation and do not intend to increase their purchases. Following the meeting held on March 18-19, the Bank of Japan published a quite comprehensive document. The bottom line is that it will continue its policy of easing.
Technically, buying the Japanese yen is unlikely in the current situation. A slight correction from the high of 109.37 from March 15 after a strong growth does not exceed 10%, and the dynamics in the futures market does not leave any chances for the bears. We expect the USD/JPY pair to continue its growth, a breakdown of the upper border of the 6-year downward channel and growth into the strong resistance zone of 112.10/20, whose breakdown will lead to a halt in the long-term bearish trend.
