22.12.202110:17 Forex Analysis & Reviews: COVID-19 continues to dominate the markets. Optimism returns, but for how long? Overview of USD, CAD, and JPY

The topic of COVID-19 continues, if not to manage the markets, then to have a significant impact on quotes. The stock indices resumed their growth as soon as it was reported in the news that the number of daily cases in South Africa fell to a two-week low. In the UK, the rate of new infections is high, but Johnson ruled out strict restrictive measures, which also added positivity. Moreover, the US Food and Drug Administration (FDA) intends to approve a pair of Pfizer and Merck pills for coronavirus treatment this week, expected to address the threat of severe illness.

As a result, the markets are inclined to believe that the new virus wave will become noticeably less harmful. It will be shorter and weaker, and if this is the case, then positive sentiment will return to trading platforms. Global yields are attempting to resume growth. The 10-year UST has almost returned to the psychological level of 1.50%, but the dynamics in the currency market are weak. Commodity currencies look a little better, as oil (+ 4%), metals (+ 1-2% on average), iron ore (+ 2.2%) are in the positive zone.

At the same time, it is too early to expect a long-term positive rise, as a number of leading indicators, such as the PMI, indicate a likely peak in the recovery. Below is the December indicator from the OECD, which indicates that there will be a slowdown in the United States, the eurozone, and Japan in the next 6-9 months. An increase in rates amid such a prospect may bring the onset of recession closer.

Accordingly, the fundamental picture looks like this – optimism in the near term and pessimism in the perspective of six months. This means long-term trends are in favor of protective assets.

The calendar for the Christmas holidays is weak, with no important releases. Therefore, volatility is likely to remain low.

USD/CAD

Canada is ending the year in a positive mood, with the labor market recovering noticeably faster than in the US. Inflationary expectations are high, but not enough to deprive the Bank of Canada of flexibility in making its decisions. The market has no absolute conviction that the rate will grow faster than the Fed's rate, and so, from the point of view of tightening financial conditions, the Canadian dollar is not experiencing additional pressure. According to TD Economics, energy prices should decrease, the inflationary momentum from the economic recovery is likely to disappear, and supply chain bottlenecks become less significant. As a result, we can expect inflation to fall.

The Bank of Canada has extended its inflation target in the range of 1-3% until 2026, and if the inflation slowdown scenario is implemented, the regulator will have no reason to raise the rate, and the stimulating monetary policy will support economic growth. In any case, it is not necessary to expect strong movements from CAD, since there are no objective reasons for such scenarios.

The Canadian dollar's net short position increased by 280 million in a week, to -1.021 billion, that is, large speculators adhere to a bearish scenario. The current growth is fundamentally justified.

The USD/CAD pair is making an attempt to consolidate above the resistance level of 1.2940. The next target is 1.3015. If optimism persists for a few more days, the Canadian dollar may be corrected to 1.28, where buying is likely to resume.

USD/JPY

The yen continues to implement a bullish reversal. According to the CFTC report, the net short position fell by 1.057 billion over the reporting week, namely to -5.884 billion. The advantage is still behind the US dollar, but the growing purchases of the yen indicate investors' fears about another wave of the crisis, which has every chance of materializing on the background of insufficient recovery of the world economy with the beginning of the withdrawal of central banks from the stimulus programs. The calculated price is directed downward.

From a technical point of view, the USD/JPY pair's bullish momentum is clear, but the active buying of the yen in the futures market suggests that the pair will decline soon. There are no significant resistances to the level of 118.60, but it can be assumed that a local peak will form below this level, and a downward reversal will take place. A return to the 111.70/112.20 zone can be considered.