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CAD/JPY Rates to Recoup Losses on Wait-and-See Bank of Canada

CAD/JPY Rates to Recoup Losses on Wait-and-See Bank of Canada

Daniel Moss, Analyst

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Canadian Dollar, CAD/JPY, Bank of Canada, Interest Rate Decision – Talking Points:

  • Worrisome vaccine news weighed on investors’ sentiment during Asia-Pacific trade.
  • The Canadian Dollar may regain lost ground in the coming days if the Bank of Canada keeps its monetary policy settings steady at its upcoming meeting.
  • CAD/JPY rates gearing up for a topside push after sliding through pivotal chart support.

Asia-Pacific Recap

S&P 500 futures nudged marginally higher during Asia-Pacific trade before sliding lower at the end of the session, as investors mulled worrisome vaccine news after AstraZeneca – one of the frontrunners in the race to find an effective Covid-19 vaccine – suspended “phase 3” trials.

The haven-associated Japanese Yen and US Dollar continued their recent resurgence as the risk-sensitive Australian Dollar slipped temporarily back below the psychologically pivotal 0.72 level.

Gold and silver both lost ground despite falling US Treasury yields and WTI crude oil continued its 6-day trek lower.

Looking ahead, the Bank of Canada interest rate decision headlines a rather light economic docket, with Mexican inflation figures for August potential proving market-moving for the USD/MXN exchange rate.

DailyFX Economic Calendar

Wait-and-See Bank of Canada Could Buoy CAD

The upcoming Bank of Canada interest rate decision may underpin CAD against its major counterparts in the near-term, as Canadian policymakers are expected to retain their wait-and-see approach to monetary policy in light of recent economic data that shows the local economy is recovering faster than expected.

Markit manufacturing PMI figures for August pointed to the largest expansion in factory activity since August 2018, and second quarter GDP shrank less than the expected 39.6% plunge.

However, with the unemployment rate still hovering above 10% and an annual inflation rate of 0.1%, the BoC is likely to confirm its commitment to “hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved” and could flag future adjustments to its policy framework.

Canada Inflation Rate

Source – Trading Economics

The BoC is currently reviewing its current monetary policy framework and could adopt the idea of average inflation targeting (AIT) to stimulate healthy price increases in the face of significant deflationary pressures.

Having said that, with the review set to be complete in 2021 and recent comments from Deputy Governor Carolyn Wilkins stating that “central banks are likely to run out of conventional firepower if we see an economic downturn in a low-interest-rate world”, the provision of additional monetary stimulus in the short-term appears relatively unlikely.

With that in mind, the Canadian Dollar may claw back lost ground against its haven-associated counterparts in the coming days if the BoC keeps its current monetary policy settings steady.

CAD/JPY Daily Chart – Key Psychological Support Under Pressure

CAD/JPY daily chart created using TradingView

From a technical perspective, CAD/JPY could be poised to extend its slide from the monthly high (81.44) after price sliced easily through Rising Wedge support and the 21-day moving average (80.60).

However, the RSI has yet to snap below its uptrend extending from the March extremes and the MACD indicator continues to track firmly above its neutral midpoint, which suggests that selling pressure may begin to fade in the coming days.

If support at the July 22 close (79.83) and sentiment-defining 200-DMA (79.75) remains intact, a resumption of the primary uptrend could be in the offing.

A daily close above the 21-DMA (80.60) probably opens a path for CAD/JPY to retest the January low (82.13), with a break above potentially resulting in price fulfilling the implied measured move (84.10) of the Descending Triangle carved out from early-June to mid-August.

Conversely, a break below the 200-DMA could ignite a more substantial correction and possibly lead price back towards support at the 50% Fibonacci (77.87).

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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