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It is impossible to single out any one reason since several factors played a role at once. The June US ISM Services index fell more than expected to 60.1 from a record high of 64.0 in the previous month. This is also a strong indicator, but the decline in the index indicates that the pace of recovery is slowing down. Similarly, production orders in Germany unexpectedly declined by 3.7% mom in May due to a 6.7% drop in foreign orders, while domestic orders rose by 0.9%. The State Council of China issued a statement in which it signals a ban on company data and offshore listings, and let's also not forget about the failure of the OPEC+ negotiations. The markets eventually considered that failure to reach an agreement could lead to an increase in uncontrolled supplies, which led to a corrective decline in oil prices.
On Wednesday morning, a decrease in demand for risk was noted, which will give an advantage to protectives assets and perhaps, to the US dollar.
USD/CAD
Canada's economic indicators are assessed positively. Real GDP growth has almost recovered and is about 1% higher than forecasts, and some negative aspects (in particular, the shortage of chips led to a decrease in real production by 1%, and the service sector lost 4% in April) are regarded as temporary.
The Bank of Canada believes that high rates of vaccination (Canada has confidently taken the lead) will allow all restrictions to be lifted in the near future. And if the provinces do not slow down the pace of lifting restrictions, then BoC may reduce the pace of asset purchases in July.
As for rates, everything is more complicated – unemployment is still noticeably higher than the pre-pandemic levels. The BoC assumes that the employment situation will normalize in the second half of 2022, wherein we can count on the first rate hike. These terms are consistent with the Fed's plans, and a driver that can accelerate the growth of the Canadian dollar should not be expected from here.
The estimated price is higher than the long-term average, which gives the dollar grounds for continuing growth. At the same time, the CFTC report shows that the net long position increased by 181 million, namely to 3.693 billion. The Canadian dollar is not being sold, and the resumption of the USD/CAD decline can be expected in the very near future.
A rise to the resistance zone of 1.2630/60 still seems to be the most likely development of events. It is still obviously corrective. If additional signals do not appear in the next few days, the sales will possibly continue near this zone. In any case, the bullish corrective impulse is fading, although it is not completely exhausted.
USD/JPY
The main indicators for Japan show positive dynamics. The quarterly Tankan index in the manufacturing sector has returned to dock levels, and the dynamics in the services sector is slightly worse, but also positive. The growth rate of average wages has updated a two-year high (+1.9% y/y), which may seem a weak indicator for other countries, but this is a very good result for the chronically deflated Japanese economy.
Strange things are happening with the budget. More recently, plans to adopt an additional budget were actively discussed since the government was sorely short of money. After that, the Bank of Japan suddenly reduced purchases of government bonds, which should eventually mean an even larger budget deficit. The latest data from Reuters, citing government sources, reports that tax revenues will be 5 trillion yen higher than forecasts and will exceed the record of 2018.
Approximately 50% of the excess will go to redeem bonds, but the remaining money will be enough to finance the deficit items of expenditure. Collectively, the news should be viewed as bullish for the Japanese yen, which will limit the rise in the USD/JPY pair. But in general, it will slightly change if the trend of demand for risk persists.
During the reporting week, the yen lost more than all other G10 currencies. The net-short position rose by 1.82 billion and reached -7.905 billion, so the decline in the pair for the first days of July is corrective and provides an opportunity to resume buying after the pullback is done.
It can be assumed that there will be another growth to the recent high of 111.66, after which the target will move to the zone of 112.10/30 zone.
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