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Complacency from the proposed Fed rate hike on July 31 may not have the expected effect. The threat of trade wars objectively contributes to the strengthening of the dollar since the economies of the main US trading partners look weak.
The dollar bears the burden of the main world currency, so if the Central Bank of Europe, Japan, the United Kingdom, and China are aimed at easing financial conditions, then in order to stop the strengthening of the dollar under these conditions, you need to pursue your own incentive policy much more actively, and by reducing the rate The situation is not correct.
If the Central Bank of Europe, Japan, the United Kingdom, and China are aimed at easing financial conditions, the dollar bears the burden of the main world currency. Then in order to stop the strengthening of the dollar under these conditions, you need to pursue your own incentive policy much more actively and by reducing the rate as the situation is not correct.
Corporate incomes are unlikely to increase significantly after reducing the rate by 0.25%, tax reform allowed to raise corporate profits after 2.5 years of stagnation, however, the dynamics of the negative quarter and stock indices have exhausted their sources of growth. Then in order to stop the strengthening of the dollar under these conditions, you need to pursue your own incentive policy much more actively and by reducing the rate as the situation is not correct.
According to Mizuho, the US stock market is highly overvalued compared to fundamental indicators and is at risk of serious correction, so in order to keep the indices at current levels. Companies need to offer something more than a one-time reduction in the rate.
Thus, the Fed meeting on July 31 may lead to the fact that the markets will react with the dollar growth and market expectations on the rate will be adjusted in favor of another one or even two cuts in the current year.
USD/CAD pair
The report on inflation in June, published by the Bank of Canada on Wednesday, turned out to be negative for loonies. The core inflation showed zero growth as the figure dropped from 2.1% to 2.0% on an annualized basis instead of the expected growth to 2.6%.
Growing inflation, combined with a consistently high level of oil prices, supported the Canadians for two months. However, both factors seem to be losing their influence. Oil prices fell to the lows of July, which was largely supported by statistics from the US Department of Energy, a sharp increase in gasoline and distillate stocks is occurring against the background of a steady decline in demand from refineries, which may indicate a reduction in consumption. Also, quotes were lowered by reports of possible negotiations between the US and Iran, which helps to relieve tension.
Thus, loonies lost the growth momentum and went to the side range. Today, data on employment in the private sector from ADP will be published then retail sales on Friday. However, they are unlikely to be able to bring the Canadian out of the trading range. The USD/CAD pair found support at 1.3020, which confirms the previous forecast. But for its passage, we need weighty arguments but are not yet available. The Resistance level of 1.3092 looks less stable in light of the growing demand for the dollar before the FOMC meeting.
USD/JPY pair
Almost a year has passed since the Bank of Japan took measures to stimulate the economy, linking two fundamental indicators into a single program. On the one hand, BoJ began a program of "quantitative and qualitative mitigation" (QQE), which was reduced to large-scale purchases of government bonds. Then, when the measures taken failed to produce results, the Bank supplemented the QQE program with an attempt to "control the yield curve" (YCC), which was supposed to stimulate lending. This ensures the gap between short-term interest rates when banks borrow and when they lend for long-term.
These measures were primarily aimed at supporting production and trade balance. Is there a result? It is more likely a no than yes. The latest report of the Ministry of Finance of Japan for June recorded a decline in exports by 6.7% y/y, imports by 5.2% y/y. Japan does not have much room to maneuver.
The trade war between the United States and China did not bring the expected dividends to the Japanese economy but it largely stimulates the demand for the yen. In the near future, the yen remains the favorite against the dollar and a test of the support at 107.53 with an eye to 106.77 is likely.
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