10.11.202110:10 Forex Analysis & Reviews: Inflation report will put the Fed in front of a difficult choice. Overview of USD, CAD, and JPY

A report on consumer inflation in the US in October will be published today, and both general and core inflation are expected to increase. These figures are important primarily because they will allow us to understand how much the Fed can afford to restrain itself in monetary policy or will be forced to intervene sooner rather than later. The dynamics of the yields of 5-year inflation-protected TIPS bonds, which is an excellent indicator of real inflationary sentiment in the business environment, is clearly bullish – the yield has reached 2.99%, which has already exceeded the maximum from 2005, that is, the business expects further inflation growth.

Accordingly, the forecasts are obvious. The overall consumer price index, which is also important in terms of the growth rate of average wages, is expected to rise from 5.4% to 5.9%, which will exceed the previous peak in July 2008 of 5.6% and the highest since December 1990.

USD/CAD

The Canadian labor market in October continued to recover in general in accordance with forecasts, but the publication of the report did not have a noticeable impact on traders.

Forecasts for the Canadian dollar are optimistic, Scotiabank sees its prospects higher than that of the US dollar, and explains its position by the fact that the Bank of Canada (BOC) is already close to a complete curtailment of its asset purchase program, which means it will start the tightening cycle before the Fed and will go further in this cycle, up to the rate of 2.25%.

An additional factor in favor of the CAD is the dynamics of commodity prices. According to the CFTC reports, there has been an outstripping growth of long contracts for oil futures for the last 6 weeks, which means the growing confidence of speculators in the further growth of oil prices.

The Canadian dollar's net long position rose by 67 million during the reporting week. The changes are minimal, and the accumulated advantage (+335 million) is also clearly not striking. It can be assumed that the momentum in favor of strengthening the CAD has not yet been exhausted, but it no longer looks strong. But as long as the estimated price is below the long-term average and shows no obvious signs of a reversal, the trend remains downward.

It can be assumed that the upward correction is almost over. An attempt to further rise to 1.2520/40 is not excluded, but the continuation of decline is more likely. The targets are 1.2284 and 1.2250. The dynamics of commodity prices, primarily oil futures, is in favor of completing the correction and falling.

USD/JPY

One of the reasons for the yen's growth, apart from the obvious one (the surge in demand for protective assets, which was reflected in the growth in demand for gold and in the fall in yields), is an internal reason, namely, a decrease in the likelihood of expanding economic support programs. In the recent elections, the LDP party used such a simple technique as pre-election promises to expand incentives, which could only be achieved through a large-scale issue, but, as often happens, immediately abandoned part of the promises as soon as it received the necessary result. According to Japanese media, the additional budget will not exceed 15 trillion instead of the expected 30 billion yen, but this is still an unresolved issue.

Reducing the threat of emissions is a bullish factor for the yen.

As follows from the CFTC report, players still do not express interest in the yen despite the downward exit from the range. The yen's net-short position increased by 85 million to -11805 billion, but the advantage in favor of the US dollar is more than significant. The estimated price is higher than the long-term average, although signs of a slowdown have become more clearly visible.

The USD/JPY pair declined from the range instead of the expected growth. Nevertheless, it can be assumed that this is not a full-fledged reversal and the chances of resuming growth remain high. A local low can be found at the current levels, or in the case of another downward wave, then in the support zone of 111.90/112.10. Nothing has changed in the long term, and the growth of USD/JPY seems to be the most likely scenario. The nearest target is 113.30/50, then 114.70.