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The US dollar has shown clear signs of strength in the past 24 hours, and the main reason can be attributed to weak European PMI data, signaling an expansion of the crisis. The Eurozone composite PMI fell to 46.5 from 47.2, marking the lowest level since November 2020. If we exclude the period of the COVID-19 pandemic, it's the lowest since March 2013.
European currencies are currently the weakest across the forex market, and the drop in oil prices is also putting pressure on commodity currencies. As a result, the US dollar continues to be in high demand, and right now we don't see any reasons why we should expect it to weaken. The Atlanta Federal Reserve employs a growth tracker it calls GDPNow, and for Q3, it is projecting growth of 5.4%, which is unmatched by Europe and other countries' prospects.
The Bank of Canada policy decision is due on Wednesday. It is expected that the policy interest rate will remain unchanged at 5%. However, there is a slight probability that the accompanying statement may include some hawkish undertones in response to the persistent threat of inflation pressures.
Indeed, the recent reports have not been optimistic. The Industrial Product Price Index in September rose above expectations, and Canadian retail sales fell by 0.1% in August, falling short of the 0.3% forecast. This indicates that consumer demand, a primary driver of price growth, remains steadily high. Wage growth has been immensely strong and has been outpacing inflation for over a year, even surpassing labor productivity, which declined during the COVID-19 pandemic and is at best stagnant now.
Fiscal policy remains overly stimulative, and there is a risk that it will become even more so as new programs supporting housing construction are added to previously announced spending plans.
The net short CAD position increased by 134 million to reach -3.556 billion during the reporting week. Speculative positioning remains bearish with no signs of a reversal, and the price continues to move higher.
The most likely scenario is a continuation of the uptrend. We expect the pair to breach the resistance level at 1.3784 and the development of the upward movement, with the next target at 1.3860. An unexpectedly hawkish decision by the Bank of Canada could disrupt this scenario, but such a decision looks extremely unlikely. If the rate forecast is confirmed and the Bank of Canada doesn't raise rates, USD/CAD will likely continue its upward movement, making it the most probable scenario at the moment. However, if the rate is raised, which is estimated to have about a 20% chance, we can expect a corrective phase. In this case, the trendline from the July lows would act as support, and the pair may fall to around 1.3610/30.
Inflation in Japan has slowed below 3% for the first time since August 2022, showing 2.8% in September compared to 3.1% the previous month. Core inflation fell to 4.2% from 4.3% and Mizuho Bank believes that the inflation trend has finally started to slow down.
The 10-year JGB yield rose to 0.870%, approaching the upper limit of the range set by the Bank of Japan. This has led to speculation that the BOJ will introduce additional flexibility in yield curve control (YCC) or make other adjustments. A report by Nikkei indicates talks among BOJ officials about further changes to the YCC policy, which fueled speculations.
The Nikkei reported that the BOJ is raising the possibility of changing its YCC policy after its October 31 meeting. If this happens, it would be a positive event for JPY. Based on the Nikkei's sources, the possibility of extending the YCC corridor to ±1.5% is being considered. The markets would interpret such an action as a step toward tightening monetary policy, and the USD/JPY pair could drop a couple of figures after the meeting once the forecast has been confirmed.
It's unclear how this will unfold, but one thing is clear: Nikkei's report has halted the yen's decline near the 150 level. If it weren't for this speculation, the yen would likely have moved higher.
The net short JPY position increased by 204 million to -8.566 billion during the reporting week, with minimal changes. Speculative bias remains bearish, but the price has lost momentum, and it currently has no distinct direction.
The uptrend remains intact, and the 151.91 target is still relevant. However, the increased probability of the BOJ reconsidering its YCC policy next week forces market participants to proceed with caution. We anticipate that as long as there is uncertainty, the pair will continue to trade within a sideways range with a slight bullish bias.
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