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The ISM production rose to 56% in August, surpassing forecasts. Positive dynamics was noted in most sub-indices, in particular, the new orders index rose to 67.6p, while it was expected to decline to 53.5p. Moreover, the strong growth of ISM indicates that the US economy is still recovering not as weakly as one might conclude, that is, if we focus on the main rhetoric of Powell, who proclaimed the Fed's course to reduce demand for the dollar.
At the same time, the employment sub-index rose from only 44.3p to 46.4p, which means that companies are not in a hurry to resume hiring; hence, a different interpretation of ISM growth. We only see the implementation of deferred demand, and we will only find out whether there will be long-term reasons for growth or not after September 17 or more precisely, following the results of the presidential elections.
USD/CAD
Canada's GDP decline in Q2 turned out to be slightly lower than forecasted, while the growth in June by 6.5% is noticeably higher than forecasted. Manufacturing PMI rose from 52.9p to 55.1p in August, while it was forecast to decline.
The Canadian dollar looks convincing, however, USD/CAD's further decline is highly doubtful without a noticeable increase in oil prices or an increase in yield spread in favor of the CAD. The estimated price has resumed its growth for the third week in a row, that is, the fundamental criteria for the growth of the value of the "Loonie" are currently used up.
The USD/CAD rate remains below fair value, Scotiabank also noted in its next weekly review – commodity prices, the relative value of stock markets and yield spreads do not give reasons to expect further decline, and it follows from the CAEA data that the preconditions of short positions in CAD is increasing in recent weeks. In fact, only two factors contribute to the decline - Fed's readiness to support the decline in demand for the dollar and the stability of commodity prices, which, however, is a direct consequence of the weak dollar.
Technically, the downward impulse looks strong, which is the third factor in the decline in USD/CAD. As a result, the bearish pressure will persist for some time. But since large speculators began repositioning on CAD, the position of the close formation of the bottom, probably in the range of 1.29/1.30, and the following upward reversal looks more reasonable. Fundamentally, the CAD is not as strong as the chart suggests.
USD/JPY
The Japanese economy continues to sink. The statistics of corporate financial statements by industry for April-June 2020, published by the Ministry of Finance on September 1, draws a negative outlook. In this regard, sales across all sectors (excluding finance and insurance) declined 17.7% y/y, which is a fourth straight decline, while ordinary profit (RP) declined 46.6%, falling for the fifth straight quarter. In addition, RP fell to 10.7796 trillion yen, the lowest since June 2011.
The situation is worsened by the fact that the Japanese economy was in a state of recession even before the COVID-19 pandemic. The said virus only strengthened the effect, but is not the reason for it at all.
The margin (the difference between expenses and profits) dropped to 4.4%, which is essentially a good indicator, but there is no reason for optimism. The highest margin for large corporations is 8.7%, while ranges from 1.1% to 1.9% for small companies, which means that most small and medium-sized businesses are balancing on the edge of profitability. On the other hand, employment conditions are deteriorating, and the rise in public debt means that business support cannot continue indefinitely. As a result, the probability of a rise in the number of bankruptcies increases, indicating worsening employment conditions, lower wages and almost inevitable deflation.
The estimated fair yen is declining, while the emotional reaction to Powell's speech unlikely to be prolonged.
As a result, we expect the USD/JPY to reverse upwards. The support is held at 105.11, so the probability of leaving above 107.00 is high, after which the impulse may strengthen with the goal of 108.10/30.
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