17.03.202110:56 Forex Analysis & Reviews: Markets are in a standby mode ahead of the Fed meeting results. Overview of USD, CAD, and JPY

Markets are in stagnation in anticipation of the results of the FOMC meeting. The issue that the committee members have to solve is so hard, which may lead to an unexpected outcome for the markets.

To start off, we have macroeconomics. The retail sales unexpectedly declined by 3% in February, after rising in January. This indicates weakening consumer demand. On the other hand, yields are rising – 5-year TIPS bonds yield showed a 2.59% growth at the end of Tuesday's trading. In fact, this is the maximum since June 2008, which means that such a yield was observed even before the crisis. The market seems to expect a further increase in inflation, and the likelihood that the Fed will somehow intervene to stop this growth looks more convincing every day.

At the same time, foreign investors' investment in Treasuries continue to decline, despite the growth in profitability. The US Treasury announced in its next report on foreign capital inflows that the inflow to Treasury Bonds & Notes in January reached another bottom of -616.4 billion dollars. There is a rapid increase in the budget deficit, which is the amount of public debt in conjunction with rising real rates that reduces the level of reliability of government bonds.

Accordingly, domestic players, that is, systemically important banks, will continue to buy the entire newly issued volume of T-bills. They directly depend on the amount of benefits provided to them. If the Fed extends the benefits, the situation will remain relatively stable. But if not, the banks will be forced to sell US T-bills for a significant amount instead of additional purchases. However, who will buy back the government's debt if foreign investors also refuse it?

Moreover, the Democrats openly insisted in the form of a letter that the Fed should not increase the benefits. Therefore, the markets can be thoroughly shocked today, since there is a high probability of unexpected decisions.

The government will have to increase borrowing growth anyway, as the real economy is stagnating. The industrial production declined by 2.2% in February, and the trade deficit, excluding oil and petroleum products, is approaching 90 billion. Accordingly, the decline in the US domestic production, and everything is going to that, will sharply worsen the current account.

Therefore, the Fed is in a dangerous situation today, with no clear solutions. If the Fed goes along with the Democrats and does not extend the stimulus program for banks, then the US dollar will definitely rise. Actually, the dynamics in the futures market are in favor of this particular scenario.

USD/CAD

More than other commodity currencies, the Canadian dollar is tied more to the state of the US economy and less to commodity prices. For example, since the US dollar continues to strengthen this week, relying on the positive effect of new stimulus programs, for the Canadian one, it means an expansion of the sales market and a revival in the economy. As a result, the Canadian dollar is in high demand.

The settlement price remains in a downward trend, and no reversal signals are observed.

It was assumed earlier that the low of 1.2466 has been updated. In this case, the next target will be further below, in particular, the long-term target is set at 1.1870.

USD/JPY

Japanese yen's net long position continues to sharply fall. The CFTC losses ranged from 1.507 billion to 0.751 billion for the reporting week. On Friday, a short position is expected to form, which will strengthen the bearish sentiment. The target price increase, with no signs of weakening impulse.

The growing demand for risk is a bearish factor for the yen, but domestic problems do not give much reason for optimism. February's equipment orders plunged for the first time in 4 months. The Cabinet of Ministers of Japan predicts a decline in Q1 by 6%, but exports fell by 4.5%. Thus, there are rising fears that a third wave of the coronavirus has begun, which will force the authorities to impose new restrictions.

The targets are still the same. The high is set at 109.86, while the medium-term target is the resistance zone of 112.20/40. There is a high probability of a technical correction and possible strong volatility at the time of the announcement of the Fed's decision and Powell's press conference.