EURJPY launched a sharp rally on the risk in long yields, which also affect EU fixed income, as Bund yields. The stronger the mandate the likely center-left coalition gets in the German election outcome, the greater the potential for EU yields to rise and EU yield curves to steepen, supportive for the euro and a headwind for the JPY, especially as Japanese fiscal plans are seen as less JPY supportive and more likely to crimp Japan’s real yields, which have so far somehow escaped the developments elsewhere, but can’t defy gravity forever if energy prices continue rising. In any case, EURJPY deserves watching here as a function of the ability of the EU yield curve to continue to steepen in sympathy with any possible developments in the US yield curve and as a function of the German election outcome. We present the weekly bar as today’s close offers could see a weekly hammer candlestick. 

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For a partial discussion on the likely outcome and the potential difficulties in forming a majority ruling coalition in the wake of the German election. Since the advent of the AfD and its 10+% result in the polls in 2017 and a likely similar result , majority coalitions are tough to build when neither side of the center is willing to consider working with the AfD. The “stoplight” coalition idea is much discussed, but the “yellow” FDP has a traditional liberal/supply side focused platform that looks incoherent compared to the Red/Green focus on higher wages and significant fiscal outlays.

In terms of how to trade the German election, the likely difficulty in forming a ruling coalition could make this a slow burn issue for months, but EURCHF upside optionality is still fairly inexpensive at 4.25% implied volatility for 3-month tenors if we get a surprisingly strong result and mandate for the Greens/Reds and a repricing much higher of EURCHF in the weeks and months to come. 

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The USD/CAD price analysis suggests further gains as the fundamental and technical pictures indicate an uptrend.

The USD/CAD soared to fresh daily highs near 1.2565 on Monday. The recent upsurge stemmed from the rise in coronavirus infection in Japan and downbeat Chinese important data. The weekly forecast for the USD/CAD pair is bullish. The contrast in the labor results of Canada and the United States drove the rise of the USD/CAD pair, achieving a weekly close above the 1.2580.

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On the part of the Fed, signs of a possible reduction of asset purchase program are beginning to be seen after some important figures made statements related to this. Like the case of Fed Vice Chairman Richard Clarida, who commented that there could certainly be announcements at the end of the year about a gradual reduction.

On the Canadian side, unemployment statistics improved but at a slower than the estimated rate. The unemployment rate decreased 0.3% to 7.5% compared to 7.8% in June. However, the number of jobs created during the last month was 94,000, far from the estimate of analysts who predicted 177,500 new jobs for July.

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The EUR/GBP dropped on Friday to 0.8519, the lowest level in three weeks, before rebounding back above 0.8530. The area around 0.8530 is the key short-term support, with a consolidation under that area opening the doors to 0.8505.

The ECB was about as in-line with expectations as possible, as the central bank delivered a “dovish taper” that was rather pre-announced already, given that Lagarde and company had announced that the pace of asset purchases would be “front-loaded” earlier this year. At the same time, the bank announced that it sought to maintain flexibility in the rate of purchases, theoretically allowing it to expand purchases again early next year if deemed necessary. There were a couple of small adjustments to the forecasts, with the GDP estimate for this year raised to 5.0% from 4.7% and the inflation forecast raised for this year through 2023 (to 1.5% ). That last adjustment is too small to indicate any concern that current high inflation levels will prove stickier than anticipated. The meeting was essentially a punt to the December meeting, which will have to see the bank rolling out a plan for how it will wind down the emergency QE after March of next year and transfer some percentage of that to the standard asset purchase plan to avoid a cliff edge. A new German government will likely loom large as well.

The ECB probably wanted to buy a bit more time before indicating taper plans to see how the first couple of months of fall and early winter shape up before taking next steps. EU sovereign bonds rallied on the meeting. 

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The weekly chart shows the euro being rejected again from above the 0.8600 area and also from the 20-week moving average. The bias still favors the downside. Below 0.8500 the bearish pressure could raise, exposing the 0.8450 zone. The area around 0.8470 is a strong barrier.

On the upside, a weekly close clearly above 0.8600 should strengthen the outlook for the euro, pointing to more gains, targeting initially levels above 0.8700.

Pockets of strength remained with agriculture commodities such as sugar and wheat receiving a boost from what so far has been a very volatile weather season across some of the key growing regions of the world. Gas prices trading at a 2 ½-year high in the US and at record levels in Europe was another area that continued to exhibit strength amid tight supply at a time of strong demand, both raising concerns that stockpiles may not build sufficiently ahead of the peak winter demand period.

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Natural gas prices across the world remain bid on a combination of hot weather driving increased demand for cooling and rising demand from industry as the global economy bounces back from the pandemic. In the US, the price of Henry Hub is trading above $4/MMBtu, the highest price for this time of year in at least ten years on a combination of rising domestic demand and rising LNG exports. This comes at a time when production has struggled to pick up, especially due to the slow recovery in shale oil production, from which gas is a byproduct.

Much worse is the situation Europe where prices have reached record levels. An unexplained reduction in flows from Russia, combined with rising competition from Asia for LNG shipments, has made it harder to refill already-depleted storage sites ahead of the coming winter. These developments have led to rising demand for coal, thereby forcing industrial users and utilities to buy more pollution permits, the price of which are already trading at record prices. All in all, these developments have led to surging electricity prices which eventually will be forced upon consumers across the continent, thereby causing a major headache for governments and potentially challenging the political will to decarbonize the economy at the agreed rapid pace.

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Concerning the RBA monetary policy decision, Bloomberg's latest poll of 16 economists said, “Australia’s central bankers are set to revisit the question of whether to delay a planned taper of bond purchases as a worsening outbreak of the delta variant dims prospects of a rapid economic rebound."

“Reserve Bank of Australia will defer scaling back quantitative easing on Tuesday,” Ten of 16 economists surveyed mentioned per Bloomberg.

The piece highlights the RBA's recent readiness to scale back weekly bond purchases from September to A$4 billion ($3 billion) from A$5 billion while also citing the challenges for the Aussie central bank going forward. 

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AUDUSD has now completed a proper V-shaped reversal of its recent sell-off, which may not lead immediately to further gains toward the next key 0.7500 area, but is a kind of exclamation point encouraging the view that we have seen the lows for now after the run down to the 0.7105 area lows before this rally emerged. A record Australian trade surplus data point overnight helped remind us of the longer term shift in the current account fundamentals, which have accelerated in the Aussie’s favour over the last year, with the Covid outbreak and the RBA’s pedal to the QE metal providing off-setting pressure until the last week or so. This rally  also in the crosses  suggest that the AUD underperformance could be set to ease for a while here and mean revert to the positive side. 

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The Bank of England meets on Thursday, and though COVID cases in the country appear to have peaked for this wave , the central bank is unlikely to make any immediate changes to policy. That said, there have been some hawkish sentiments emerging from the Monetary Policy Committee in recent weeks following a jump in inflation to 2.5% in June, the highest reading in three years and above the central bank’s 2.0% target. As such, traders will be watching to see if the BOE raises its inflation forecasts moving forward, hinting that the price pressures may be less transitory than expected. Finally it’s worth noting that the UK furlough scheme winds down at the end of September, so it will be interesting to see if the central bank acknowledges the potential for the labor market to weaken in the coming months. 

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GBPUSD has pulled back sharply from its near-death experience below the prior major lows around 1.3670 and is now pushing up close to . Given its tight correlation with the risk-off, risk-back-on episode starting around mid-month in July, the 1.4000 level could prove a tough to crack if the sense of foreboding, turns into a significant rout in risk sentiment, although there are other supports for this move, including the generally widening spread in short rates in the UK’s favour in recent months, which has the spread near the cycle highs and the highest level since….2015.

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USDJPY is champing at the bit of local resistance above 110.00 as EU and US yields have suddenly come alive here ahead of the Jackson Hole speech from Fed Chair Powell . Entirely unsure whether that speech will have major implications for the US treasury market in the near term, but if yields do pop back higher, we will likely suddenly have a different setup for USDJPY, which could go on to challenge its cycle top in the event the US 10-year treasury benchmark, for example, goes on to pop above the big 1.50% area (1.35% currently). The higher yield threat will need to fade to see the pair challenging back toward that 109.00 area that didn’t sustain the break earlier this month. The setup here echoes the triangulation in the price action back in Nov-Jan before US yields staged a major revival. Note the Ichimoku cloud levels in play here as well.  

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Major setbacks in corn and wheat helped drive the grains sector sharply lower just one week after weaker-than-expected U.S. acreage and stock reports helped drive the sector higher. Overall, the year-long surge in global food prices paused in June after the UN FAO reported the first drop in 13 months in its Global Food Price Index. It dropped by 2.5% in June with the year-on-year surge easing to a still elevated 34% from 40% in May. The decline was driven by a near 10% slump in edible oils, such as palm, soy and sunflower oils, while the mentioned fall in corn and maize also supported the decline.

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Corn was the biggest loser this past week in response to improved weather conditions across the U.S. Midwest and equally important on speculation that China’s import demand has peaked with local corn futures trading near the lowest levels this year. This is in response to rising Chinese production and expectations that demand for the grain towards animal feed will decline as loss-making hog farmers have stopped expanding herds. A recent USDA briefing from Beijing estimated the country’s imports in 2021-22 will reach 20 million tons, well below the department’s official 26-million-ton forecast. 

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Brent oil dropped to the lower end of the $65 to $75 range, that we could see prevail for the remainder of the year. We see reduced risk of a slump below this range on expectations OPEC and friends may step in and announce measures to support the market, potentially by postponing agreed production hikes until a clearer demand picture emerges. Brent oil has been on the defensive this month since the number of Covid-19 cases in China and the U.S. began rising, thereby clouding the demand outlook in the world’s biggest importer and consumer of Brent. 

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Adding to current price risks, apart from demand concerns and the general level of risk adversity sending the dollar higher, was weekly data from the EIA showing US drillers, in response to the earlier price surge, are pumping the most crude in a year. In addition to an expected seasonal slowdown in demand, perhaps strengthened by the Covid-19 surge, and the market is suddenly looking less tight than what was expected just a few weeks ago. 

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The review of the ECB’s monetary policy strategy was announced in January 2020 by its policy-making Governing Council and the results were due to be published by the end of last year. Since then the review has been largely ignored by the markets, which have concentrated on the coronavirus pandemic, the ensuing global economic downturn, and more recently, the recovery from that slump and the prospect of rising inflation.

The ECB has already made clear that it has no intention of tightening policy near term, in line with other central banks that have described inflation as likely to be transient. The results of the review will likely reinforce that message by stating more formally that the ECB will tolerate inflation that it regards as temporary, and the Euro will likely ease further ahead of its publication as investors begin to focus on what it might say.
One outcome of the review could be a revised inflation target, with the ECB moving from the current definition of price stability as “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the Euro area of below 2%” The Governing Council clarified in 2003 that in the pursuit of price stability it aims to maintain inflation rates below, but close to, 2% over the medium term.  

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This year that could change to a symmetric medium-term inflation target of 2%, with the ECB tolerating inflation above or below that level. In the current situation that would mean continuing low interest rates, bond-buying and quantitative easing even if inflation rises well above 2% so as not to throttle the recovery in its infancy.
Market pricing reflects expectations so Euro weakness could well precede publication of the review. That indicates traders will need to be on the lookout for hints about its contents from Governing Council members and in particular from ECB President Christine Lagarde. She dropped one such hint in mid-June, when she suggested to Politico. 

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