A week of silence before the Fed meeting on November 2 helped reduce volatility in markets. Then, weaker macroeconomic data from the US strengthened confidence that the Fed will slow the pace of growth of interest rates. This is also why stocks continued to rally despite weak data and some deterioration in corporate earnings. Pound also rose after Rishi Sunak became the new prime minister of the UK. However, quotes are likely to move sideways starting today.
Inflation in Canada turned out to be higher than expected in September even though it fell from 7% to 6.9% (6.8% was expected). Meanwhile, the core index rose to 6%, instead of falling from 5.8% to 5.6% as predicted. Clearly, price pressure continues to spread, capturing wider sectors of the economy. Although gas prices fell by 7.4%, rising prices in the service sector more than offset the decline.
A week ago, markets expected the Fed rate to increase by 50 basis points. But now they are counting on a 75 basis point hike, and some even anticipate as much as 100 points, which, of course, is unlikely, but clearly indicates a slight panic in the markets. If the Fed press conference today is hawkish, and the November meeting hint at a potential 50bp rate hike in December, the situation will shift in favor of the loonie, which will eventually lead to a reversal of USD/CAD. Although it is too early to talk about this, the Bank of Canada will most likely act more cautiously.
So far, according to the latest CFTC report, the net short position in CAD decreased by 363 million to -1.5 billion. But positioning remains bearish despite the slight adjustment. The estimated price is above the long-term average and is directed upwards, which gives reason to expect USD/CAD to continue growing.
If the BoC shows firmness today, the pair is likely to fall towards the support level of 1.3510/20. But more realistic is the resumption of purchases, followed by a transition to a sideways range in anticipation of the Fed meeting on November 2.
Yen broke the psychological level of 150 and flew to a new multi-year record, which led to an emergency intervention by the Bank of Japan. This caused USD/JPY to drop to a low of 146.23, the same magnitude as during the last intervention on September (£145.90 to £140.26). The exact amount of the intervention will be known after the Ministry of Finance publishes its report on October 31, but it is clear that it was no less than that of the previous intervention.
There was another intervention on Monday, but it did not lead to the expected result. It seems that Japan is losing capital, and its foreign investment income is not enough to cover the deficit. Most likely, this will continue as long as the Bank of Japan carries on its ultra-soft policy.
According to the latest CFTC report, the net short position in JPY rose by 1.267 billion to -7.9 billion. The positioning is steadily bearish, and there are no signs of a reversal.
USD/JPY will continue to rise until the Bank of Japan changes its monetary policy. Perhaps, the meeting on Friday will give some news, but interventions will not be able to block growth.
The material has been provided by InstaForex Company – www.instaforex.com