Talking Points:

- USD/JPY Rate Snaps 2018 Opening Range; November-Low on the Radar.

- USD/CAD Rebound Mired by Growing Bets for BoC Rate-Hike.

DailyFX TableUSD/JPY

USD/JPY extends the decline from earlier this week even as U.S. Treasury yields push to fresh monthly highs, and the pair may continue to give back the rebound from late last year as it snaps the opening range for 2018.

After watching USD/JPY broadly track the U.S. 10-Year Treasury yield in 2017, the key dynamic appears to be unraveling, with the dollar-yen exchange rate now at risk of testing the November-low (110.84) as it extends the series of lower highs & lows from earlier this week. Keep in mind, the recent pickup in market volatility is occurring ahead of the fresh updates to the U.S. Consumer Price Index (CPI), which is anticipated to show a slowdown in the headline reading, and the dollar stands at risk of facing a more bearish fate should the data print dampen the outlook for inflation.

In turn, downside targets remain on the radar for USD/JPY especially as the Federal Open Market Committee (FOMC) is widely anticipated to retain the current policy at its next interest rate decision on January 31, and the pair may face a more meaningful correction over the coming months as the Bank of Japan (BoJ) appears to be approaching the end of its easing-cycle.

USD/JPY Daily Chart

USD/JPY Daily Chart

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  • The break of the descending triangle/monthly opening range raises the risk for a further decline in USD/JPY especially as the Relative Strength Index (RSI) continues to track the bearish formation carried over from the summer months.
  • Break/close below the 111.10 (61.8% expansion) to 111.60 (38.2% retracement) region opens up the November-low (110.84), with the next downside area of interest coming in around 109.40 (50% retracement) to 110.00 (78.6% expansion).
USD/CAD

USD/CAD continues to retrace the sharp decline from the previous month as Canada Building Permits narrow 7.7% in November, but the recent rebound in the exchange rate may unravel ahead of the Bank of Canada’s (BoC) next meeting on January 17 amid growing expectations for a rate-hike.

The ongoing improvement in Canada’s labor market may encourage Governor Stephen Poloz and Co. to further normalize monetary policy in 2018 as ‘inflation has been slightly higher than anticipated and will continue to be boosted in the short term by temporary factors,’ and the central bank may prepare Canadian households and businesses for higher borrowing-costs as officials warn ‘higher interest rates will likely be required over time.’ With that said, the broader shift in USD/CAD behavior may continue to unfold in 2018, with the pair at risk of giving back the rebound from the September-low (1.2061) amid the series of failed attempts to push back above the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region. Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

USD/CAD Daily Chart

USD/CAD Daily Chart
  • USD/CAD may stage a larger rebound as the Relative Strength Index (RSI) bounces back from oversold territory, but the near-term outlook remains tilted to the downside as the oscillator extends the bearish formation from November.
  • May see USD/CAD cling to the monthly opening range as it struggles to push back above the 1.2440 (23.6% expansion) to 1.2510 (78.6% retracement) region, with the next topside hurdle coming in around 1.2620 (50% retracement).
  • Nevertheless, a break/close below 1.2350 (38.2% expansion) raises the risk for a move back towards 1.2210 (50% expansion) to 1.2250 (50% retracement), with the next region of interest coming in around 1.2080 (61.8% expansion), which sits just above the September-low (1.2061).
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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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