Date: 24 Oct 2018

The Bank of Canada (BoC) is expected to tighten policy two more times in 2019, as Canadian economy seems to continue growing at faster than its potential over the coming quarters, boosted by US fiscal stimulus that should increase demand for its exports. A deal at the end of September to face-lift the North American Free Trade Agreement (NAFTA) in turn reduced the risk of Canada’s exports being disrupted, setting a platform for more interest rate hikes from the BoC.

Canadian consumer price index (CPI) dropped to 2.2% year-on-year in September, compared to the 2.8% registered in August and failed analysts’ estimates of 2.7%.  It was the lowest inflation rate since May 2018 driven by a slowdown in the transportation index, although it remains the major provider to the year-over-year increase in consumer price index. The Bank of Canada (BoC) an inflation range target from 1% up to 3%. A high CPI reading can be seen as an early warning of a rate hike, which is positive for the Canadian dollar (CAD).

On the Japanese side, Bank of Japan (BoJ) Governor Kuroda speaking at the Japanese Trust Banks Association meeting in Tokyo, said that consumer prices are rising as a trend but still leaves the BoJ a long way from its 2.0% inflation goal. Governor Kuroda also said that the critical element needed to drive inflation toward its goal is higher wages that can boost consumption.

Looks like investors remain nervous, searching for safety, due to political fears across Europe, and fuelled by tensions between the US and Saudi Arabia following the killing of a Saudi journalist in Turkey. Backing investors nervous is the Bank of Japan (BoJ) Governor Kuroda who also expressed concerns about “nervous” moves in global stocks driven by a clear sign that volatility has alarmed increased. During periods of economic or geopolitical uncertainty, investors often want the Japanese currency (Yen) for its relative safety.

Since the beginning of 2018 until last Tuesday close, the CADJPY remains under water with a loss of over 4.0% and since the start of October, the currency pair dropped more than 2.8%. Nonetheless, on the weekly, it is rather flat with a minor gain of 0.13% and on the daily basis closed relative red with 0.16% loss, furthermore, it made a phase change, shifting from a bullish to a warning phase.

On the last Tuesday session, the CADJPY initially dived with a wide range but found enough buying pressure near 85.362 to trim most of its losses and managed to close near the high of the day, although, closed within Monday’s range, which suggests being slightly on the bullish side of neutral.

The stochastic is showing an oversold market and is beginning to display a shy bullish momentum.

The MACD histogram is exhibiting a hidden bullish divergence this kind of divergence happens when the price is making a higher low, but the MACD histogram is showing a lower low. In this case, the hidden bullish divergence suggests a possible trend continuation to the upside

The currency pair began a downward correction in early October but it seems to have found enough buying pressure around the key level 85.739 to hold the price preventing any attempt of closing below it. Now it has been consolidating for nine days straight, which suggests that investors may be waiting for the Bank of Canada (BoC) rate decision later today.

Watch out this week: On Wednesday at 14:00GMT (10:00 AM ET) the Bank of Canada (BoC) is expected by market analysts to raise its interest rate by 25 basis points (bps) to 1.75% and if confirmed it would be the fifth rate hike since July 2017, as officials attempt to contain the flourishing Canadian economy. Generally, an increasing interest rate is viewed as positive for the Canadian dollar (CAD). On Thursday at 23:30 GMT (7:30 PM ET) the Japanese core consumer price index (CPI) year-on-year in October will be released, with market analyst estimating to be unchanged at 1.0% inflation. The Japanese core CPI measures the change in the price of goods and services purchased by consumers in Tokyo, excluding fresh food. Generally, a high reading is recognized as positive for the Japanese yen (JPY).

 

CADJPY: Consolidating as investors wait for Bank of Canada rate decision

CAD/JPY Daily Candlestick Chart

 

Written by Hugo O’Neill, External Analyst

 

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