29.08.201909:56 Forex Analysis & Reviews: You should not expect a decrease in tension: JPY strengthens and CAD weakens

On Thursday morning, there is a decline in major Asian stock indexes. Europe is preparing to open in the red zone with the lack of signs of a decrease in the level of escalation in the US and China trade dispute, as the main reason. Once again, Brent fell below $60 per barrel while the December gold futures approached a 6-year high and the yield on 30-year US government bonds was near a historic low.

Trends favor growth in demand for defensive assets.

USD/CAD pair

The Bank of Canada did a little research and the purpose of which was to find out whether the Philips rule is still in effect, establishing a connection between the state of the labor market and inflation or the economy has changed so much after the 2008 crisis that completely different criteria are now on the agenda.

The results are somewhat unexpected in all developed countries and Canada is no exception. the relationship between the level of wages and the general state of the labor market is still quite high, and the surge in average wage growth in the post-crisis years is largely due to the previous long period of high levels of unemployment.

The conclusion is obvious: the current stable state of the labor market and low unemployment will lead to the fact that the average wage will begin to decline, which will inevitably lead to a decrease in inflation.

The latest labor market report in July showed that unemployment may have already reached a minimum. The share of labor in the total population has also begun to decline. Hence, the average wage, which is still at a very high level of 4.5% y/y, has a very high probability to reach a maximum already and further downward only.

The Bank of Canada will hold a regular meeting on September 4 and new data on the labor market will be released only on September 6. So far, BoC keeps the rate at 1.75%, clearly standing out from a number of other countries as Australia, New Zealand, and the US have already embarked on a cycle of rate reduction. Moreover, those countries where the rates are near zero are going to stimulate the economy by traditionally unconventional methods.

What follows from this? The conclusion suggests itself that the Bank of Canada may surprise markets next week by lowering the rate to 1.50% or announcing its intention to take some other measures to stimulate the economy. Perhaps a clue will appear tomorrow when the data on GDP for 2 square meters will be published. But in any case, you need to be prepared for a possible breakthrough of the resistance zone at 1.3320/40. If the general tension decreases and the stock markets maintain a growing trend, the Canadian will stay in the range, which will also pull oil but the chances of this scenario are decreasing every day.

If the Bank of Canada joins other Central Banks that have taken a course towards adding stimulus, then the USD/CAD growth potential is visible to 1.3470/90 in the short term and to 1.37 in the longer term.

USD/JPY pair

The Bank of Japan has significantly fewer opportunities for further easing than the Fed or the ECB. Therefore, now, the regulator faces the main question on how to prevent the yen from strengthening as the margin of profitability for Japanese exporters becomes closer as the next economic crisis approaches.

However, there are still some possibilities of reducing credit spreads in order to reduce long-term bond yields and introduce negative interest rates, but in fact, such steps are uncharted land, terra incognita. In the event of further escalation of the trade war between the US and China, the increase in panic will nullify all the efforts of the Bank of Japan and force it to conduct direct interventions, following the example of the NBS.

Today, an extensive data package on inflation, retail sales and the labor market in July will be published. No matter how much the data differ from forecasts, the yen will continue to strengthen and only the speed can vary. The minimum of the week at 104.42, which is immediate support and at the same time the target of the bears. The resistance of 106.24 at the upper border of the channel with growth attempts are more logical to use for sales.