January's retail sales data, producer prices, and industrial production exceeded forecasts, which intensifies the demand for the US dollar, since it indirectly supports inflation expectations and increases the possibility of cancelling Fed's super-soft monetary policy in an earlier time.
At the same time, the Treasury's report on foreign capital inflows in December showed a general rise in US securities. The strongest inflow to the US stock market does not weaken, and some downward pullback on treasuries is fully compensated by the inflow to the US government agency bonds, that is, to the authorized federal agencies, which just acts as a second-plan borrower and their participation does not formally increase the level of public debt. In general, it should be noted that foreign investors are experiencing an interest growth in US securities, which creates additional demand for the dollar.
So far, traders assumed that the release of the Fed's minutes of their last meeting will not give any surprises. The growth of oil may be slightly slowed down by Saudi Arabia's plans to increase production, but the vaccination rate against COVID-19 will continue to be the primary factor. Demand is mainly for risky assets, while the bullish mood is for the dollar.
The Canadian expectedly fell again to the support level of 1.2590, but it will most likely be worned out. The net long position of CAD lost 509 million on the futures market and declined to 751 million. And although the Canadian dollar is still in favor, the trend is more inclined to the US one. The estimated price is still below the long-term average, which offers an opportunity to resume the downward trend, but obvious attempts to reverse were observed.
The Canadian did not make a reaction to January's inflation growth. The index increased from 1.5% to 1.6%, against the forecasted decline to 1.4%. The situation is not saved by expensive oil, which is rising due to the inability of the US energy system to cope with weather conditions, and this led to rolling power outages in a number of states.
Among the other countries, Canada is the closest to the 2% target. Thus, a positive trade report can be expected on Friday. Statistics Canada predicts a decline of 2.6%, while Bloomberg said 2.5%. These risks are already included in prices, and given the stronger-than-forecast inflation, retail may also surpass the forecast, which will give the CAD more impulse. Such releases are important from the viewpoint of the forecasts of the Bank of Canada, which has not yet announced if it will make changes to the current policy.
In favor of lowering the USD/CAD pair, there are growing hopes for a global economic recovery, primarily related to the increasing pace of vaccination, which will lead to sustainable long-term growth in raw materials. Given that a number of factors point to a stronger dollar, let's assume that the support for 1.2590 will hold, trade will move into the range, and the price will pull closer to the upper limit of 1.2578 in the next few days.
Japan's industrial sector is slowly recovering from the failure, with orders in the private engineering sector (excluding ships and electricity) rising by 5.2% m/m in December; it was rising three months in a row, contrary to Bloomberg's forecast of a 6.1% decline. The total cost of orders recovered to pre-pandemic levels, and the annual drop in volumes declined to 8.4%.
The JPY exactly utilized the forecast, forming a base around the support level of 104.57, which was followed by sharp growth. The net long position in the futures market has significantly plummeted: 1.177 billion contracts were lost. In turn, the settlement price is higher than the long-term average, giving reason to expect steady growth.
After forming the base of 102.61 on January 5, this is the third upward momentum with two corrections, which is unlikely the limit. The Japanese yen might make a downward reversal only if some unexpected negative factor occurs, but if the situation continues to develop according to the current trends, then growth will remain a priority. The target set at 106.73 is likely to consolidate a little bit above than the formation of a local base.