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 weakening today, as the global stock market rebound runs out of steam. In general, riskier assets such as stocks and commodities are doing poorly today, which is driving down the Canadian dollar. CAD is currently selling off against safe haven currencies such as the US dollar and the Japanese yen. The loonie is flat against the euro and the British pound. The US dollar is strengthening today, alongside most global government bonds. Safe haven assets such as the US dollar and government bonds typically rally when risk sentiment is weak. Turning to NAFTA discussions, top US and Mexican officials are cautiously optimistic that NAFTA can be renegotiated. The seventh round of negotiations will take place in Mexico City starting on February 25. As Mexican presidential elections are set to take place in July, there is a likelihood that talks will have to be postponed until later this year. Our short-term outlook on the Canadian dollar is neutral, while our medium-term outlook remains bullish.
The USD/CAD exchange rate is currently above 1.2540. The euro is flat against the Canadian dollar, with EUR/CAD currently above 1.5590. The pound is also flat against the Canadian dollar, with GBP/CAD trading above 1.7570.
This is a very light week for economic data from Canada. Manufacturing sales figures missed expectations by a significant degree (-0.3% vs. 0.2% expected). Last week, trade balances and changes in employment were below expectations.
The Japanese yen continues to strengthen today, particularly against the US dollar. As a safe haven currency, the yen tends to weaken when global growth is accelerating and strengthens during downturns. While the yen began rising following fears of an extended stock market rout, the currency continues to strengthen despite a rebound in most global stock markets. Looking at Japanese domestic data, weak quarterly GDP growth figures and falling machinery exports helped yen strength this week. Turning to monetary policy, the current Bank of Japan Governor Haruhiko Kuroda was appointed for a rare second term, despite his age (73). Kuroda was appointed alongside deputies including BoJ executive director Masayoshi Amamiya and Waseda University professor Masazumi Wakatabe. Both are well-known for their pro-monetary easing views. Unfortunately for the yen, this isn't enough to change the course of the currency as it continues to strengthen. Our short-term and medium-term outlook on the yen remains bullish.
USD/JPY is currently trading above 105.80. EUR/JPY is currently flat and trading above 132.70.
Looking at Japanese economic data, traders will be focused on upcoming GDP figures. Annualized QoQ GDP growth numbers (0.5% vs. 0.9% expected) widely missed estimates. Machinery orders (-5% vs. 2.2% expected) missed expectations by a very wide margin due to falling exports. Industrial output (2.9% vs. 0.5% prior) was higher than previous figures. Cross-border stock (-¥429.5b) and bond (-¥973.2b) investments continue to suggest capital inflows into the country. Last week, cross-border figures also showed that capital was flowing into Japan (strengthening the yen).
As the pair weakens, we are now bearish on CAD/JPY. Looking at technical conditions, CAD/JPY is now looking oversold. 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 trading within normal conditions. This is based on technical indicators looking at a weekly chart of the pair.
When will the Canadian dollar rebound? We take a closer look at the Canadian dollar future forecast and what the latest Commitments of Traders report says about the currency. Bank of Canada remains cautious - impacting trader optimism, but better data has us rethinking an earlier prediction.
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