Canadian Dollar Outperforms, Japanese Yen Weighed By Risk Appetite

The Canadian dollar pared the overnight decline and is the best performing currency against the greenback on Wednesday as the Bank of Canada increased the benchmark interest rate to 1.00%, and speculation for further rate hikes could lead the loonie to appreciate further over the near-term as the central bank expects the recovery to gather momentum going forward. The USD/CAD is nearly 120 points lower from the open after moving 122% of its average true range, and the exchange rate may continue to push lower throughout the day until we see the 30-minute relative strength index bounce back from oversold territory. When the RSI climbs back above 30, we could see the dollar-loonie fill-in the gap from the 120-SMA at 1.0410, but the economic releases scheduled for the next 24 hours of trading could push the exchange rate lower as it is expected to reinforce an improved outlook for the Canadian economy. At the same time, the rebound in market sentiment reinforces a bullish outlook for the Canadian dollar, and the USD/CAD may push lower going into the Asian trade as risk trends continue to dictate price action in the currency market.

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The Japanese Yen weakened across the board following the rebound in risk sentiment, and the low-yielding currency may lose ground throughout the day as price action bounces back from a fresh yearly low of 83.35. The USD/JPY is 10 points higher on the day after moving 81% of its average true range, but the pair is likely to face increased volatility later today as the Federal Reserve is scheduled to release its Beige Book economic report at 18:00 GMT. We are likely to see a reaction in the dollar-yen and cautious comments from the central bank could lead the exchange rate to pare the overnight advance as policy makers in the world’s largest economy continue to see a risk for a protracted recovery. As a result, U.S. dollar weakness could carry over into the Asian session, which could push the pair to test 83.00 for psychological support. However, if traders decide to overlook the Fed’s economic assessment, the dollar-yen may continue to retrace the decline from earlier this week and work its way towards the 240-SMA at 84.14. At the same time, with the daily RSI continuing to push towards oversold territory, there could be a short-term correction going into the end of the week, but the DailyFX Speculative Sentiment index suggests that the pair will continue to trend lower as nearly 6 retail traders are long for every short.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com