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06.10.202109:55 Forex Analysis & Reviews: Energy crisis is supporting commodity currencies. Overview of USD, CAD, and JPY

On Tuesday, European and US stocks rose after the publication of a stronger-than-expected ISM index for the US services sector. The index increased to 61.9 p from 61.7 p a month earlier, even though a decline to 59.9 p was expected. A strong ISM indicates the resilience of the US economy, despite the delta strain of coronavirus, and, most importantly, increases the chances that the Fed will announce the start of the reduction of the QE program at the next meeting in early November.

It should also be noted that the employment index slightly fell from 53.7 p to 53.0 p, still staying in the expansion zone, which is also a positive signal before the publication of the employment report on Friday.

The confident ISM report increased the demand for risk and contributed to an increase in energy prices. Brent and WTI rose by almost 2%, the rapid growth of natural gas prices in Europe does not stop, and the British and Dutch futures showed a daily increase of almost 20%, which seems to be unreal.

We expect that current trends will develop at least until the publication of the employment report on Friday. There is simply no mechanism capable of stopping the rise in energy prices, and therefore, commodity currencies will strengthen the fastest. The US dollar also remains the favorite, while the yen, the franc, and the euro will be under strong pressure.

Today, attention should be paid to the ADP report on employment in the private sector – an increase of 428 thousand is expected, but it should be noted that the report is largely based on official unemployment data for the previous month, so there is a risk that the data will come out below +400 thousand. The dynamics of oil prices may be strongly influenced by the EIA inventory report.

USD/CAD

The Canadian dollar is trying to extract dividends from rising energy prices. According to the CFTC report, the Canadian dollar's net short position immediately fell by 0.58 billion, namely to -1.595 billion. The bears still have the advantage, but the momentum has clearly slowed down. The estimated price remains above the long-term average, which indicates that the USD/CAD upward trend dominates, but its strength is questionable and a downward reversal in the short term is not excluded.

Exchange Rates 06.10.2021 analysis

Canada's economic situation is stable. Basic demand remains at a high level, exports are growing with stable imports, and the GDP forecast for the 3rd quarter is being revised upward by a number of banks, which will support the Canadian dollar.

A lot depends on the development of the situation with oil prices. If the price growth continues, which is reasonable, then it is possible to move to the level of 1.2490 and try to consolidate below. If there is a stabilization in energy prices, albeit relative, then the US dollar will turn into a favorite again. In this case, the first target is 1.28, and the second one is the resistance zone of 1.2900/50.

USD/JPY

The yen is finally losing all grounds for a possible strengthening. The new Prime Minister Kishida seems to be actually dovish and already intends to initiate the adoption of a new spending package in the amount of about 15 trillion yen. The energy crisis leads to a sharp drop in demand for the assets of the countries that buy raw materials, which includes Japan. At the same time, the Nikkei index, which recently seemed to have successfully consolidated above 30,000 p, has already lost almost 10% of the maximum and is preparing to update the two-year low. Japan's industry is facing the threat of a severe slowdown.

Over the week, the yen's net short position increased to -7.26 billion, returning to the lows of a month ago. The target price rushed upwards, which practically excludes the probability of a bearish reversal.

Exchange Rates 06.10.2021 analysis

The USD/JPY pair is expected to test the resistance zone of 112.20/40 in the near future and further rise, leaving the multi-month consolidation zone. The next target is the level of 114.60. A consolidation above it will mean that the upward trend will receive additional confirmation.

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