After a strong bull market that lasted from November 2016 (following Trump's victory) to January 2017, CAD/JPY reversed for many months until June. Since then, the exchange rate has strengthened thanks to underlying strength in the Canadian dollar. The loonie has been supported in the latter half of 2017 by strong economic growth and interest rate hikes.
The Canadian dollar is currently mixed. CAD is weakening against the US dollar and the British pound, while making gains versus the Japanese yen and the Australian dollar. Yesterday, the loonie managed to end the day slightly higher against the US dollar. Unfortunately, the currency has given up yesterday's gains thanks to the ongoing US dollar rebound.
Turning to recent news, Reuters is reporting that a Mexican business leader has claimed that a new NAFTA deal could be reached in 10 days. Moises Kalach made the statements yesterday. He is the current head of the CCE business lobby, which represents Mexico's private sector in the NAFTA negotiations. With NAFTA looking more and more like a done deal, news headlines relating to NAFTA are having a limited impact on the Canadian dollar. Instead, the currency is trading primarily as a function of recent US dollar strength. As global growth decelerates, rising US bond yields are making the US dollar a more attractive investment destination relative to the loonie. The Canadian dollar is selling off as a result.
While we upgraded our outlook on the Canadian dollar to neutral earlier this week, recent weakness means that the broader trend is looking bearish again. Later today, we will downgrade our short-term outlook to bearish. We expect to downgrade our medium-term outlook back to bearish later this week or next week.
The USD/CAD exchange rate is currently above 1.2850. The euro is flat against the Canadian dollar, with EUR/CAD currently above 1.5690. The pound is up slightly against the Canadian dollar, with GBP/CAD trading above 1.7940.
This is a very light week for economic data relating to the Canadian dollar, as no significant data releases are scheduled for this week. Last week, the Bank of Canada maintained its existing interest rates, while suggesting that accommodative policies were set to continue.
The Japanese yen is mostly lower today, and is selling off against all major currencies except the Australian dollar and the euro. Yesterday, the currency weakened alongside rising bond yields. Looking at USD/JPY, the pair managed to close higher despite overall weakness in the US dollar and a significant sell-off in the S&P 500 during US trading hours. While USD/JPY tends to track risk sentiment, the yen has become more sensitive to bond yields in recent times.
With limited news headlines and developments from Japan, the yen is mostly trading as a function of bond yields. As Japanese 10-year bond yields are fixed around 0% by the Bank of Japan, the difference between US and Japanese yields is just under 3% (as US 10-year bonds are currently yielding around 3%). While higher US yields have failed to weaken the yen in the past, interest rates have been driving currency markets since late March. As we have written before, this is because slowing global growth is reducing optimism for riskier investments. In the past, investors ignored rising US yields and chased investments such as technology and emerging market stocks. Today, rising US bond yields are hurting asset values as global growth decelerates. Our short-term outlook on the yen is bearish, while our medium-term outlook is neutral.
USD/JPY is currently trading above 109.20. EUR/JPY is currently up slightly and trading above 133.20.
Looking at Japanese economic data and events this week, the Bank of Japan’s upcoming meeting will be watched closely. The March Nikkei manufacturing PMI (53.3 vs. 52.6 expected) was ahead of expectations. The leading economic index for February (106 vs. 105.8 expected) was ahead of expectations. The All Industry Activity Index for February (0.4%) met expectations. Tomorrow, we’ll see foreign investment in Japanese equities and Japanese investment in foreign bonds. On Friday, the most important day, we’ll get the latest interest rate decision from the Bank of Japan, its outlook report and a press conference. We’ll also see the Tokyo consumer price index for April, the unemployment rate for March and March household spending. Finally, we’ll get March industrial production, and March retail sales, and March housing starts.
As the pair trades sideways, we are now neutral on CAD/JPY. Looking at technical conditions, CAD/JPY is now trading within normal conditions. This is based on various indicators looking at a daily chart of the pair.
As the pair weakens, we are now bearish on CAD/JPY in the medium-term. Note that the pair is now trading within a normal range. This is based on technical indicators looking at a weekly chart of the pair.
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