FOREXCOM:CADJPY   Canadian Dollar / Japanese Yen


1. The Monetary Policy outlook for the BoC

At their September meeting the BoC delivered on market expectations by not providing any new information. The bank acknowledged the recent hit to growth has been bigger than expected, but also explained that they deem the hit to be temporary and still expect solid growth this year. They also reiterated that even though inflation is currently high and expected to climb, they deem current price pressures as being mostly transitory. The meeting did nothing to change the market’s expectations that the bank will go ahead to announce another round of tapering of C$1 billion at their October meeting, especially after the recent jobs report painted a picture of a growing and recovering labour market, albeit at a slightly slower pace compared to June and July.

2. Commodity-linked currency with dependency on Oil exports

Oil staged a massive recovery after hitting rock bottom in 2020 and the move higher over recent months has been driven by supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the med-term as long as current supportive factors and drivers remains intact. There will of course be short-term ebbs and flows which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher it should be supportive for Petro-currencies like the CAD. The recent energy crisis affecting large parts of the globe has placed upside pressure in Oil , Gas and Coal and is a theme to keep track of for the CAD, both to the up and to the downside. These past few weeks’ rise in Oil prices saw solid support for the CAD and will remain a key short-term intermarket consideration for the oil-dependent economy and currency. A possible risk for Oil prices (and by connection the CAD) is any attempts by the US or OPEC+ to calm down the recent rise in oil prices. On the US side they could opt to release more of their reserves and on the OPEC side they could announce additional increases in production output, so watch those as risks to oil .

3. Developments surrounding the global risk outlook.

As a high-beta currency, the CAD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver.

4. CFTC Analysis

Latest CFTC data showed a positioning change of -994 with a net non-commercial position of -27860. With the solid beat in the September jobs report, we finally saw markets trading the CAD back in line with its fundamental bullish bias, with USDCAD finally gaining enough momentum to push below key trend and psychological support levels. In the week ahead Canadian CPI will be interesting, but arguably not enough at this stage to sway the BoC’s tapering plans. Even though the positioning for the CAD does not look stretched, the CAD has outperformed its peers by a big margin in the past two weeks which could spark some mean reversion.



1. Safe-haven status and overall risk outlook

As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.

2. Low-yielding currency with inverse correlation to US10Y

As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. The rangebound price action in US10Y from July saw our conviction for more upside in USDJPY take a knock, and we have been waiting for US10Y to make a more sustainable break before we look to add longs in USDJPY . This week, we finally saw US10Y being able to clear the key 1.38% level that has acted as strong resistance since July. Thus, as long as US10Y manages to stay above 1.38% we would look for pull backs in USDJPY to look for med-term buy opportunities. However, since 1.38% was such a key level, any break and close below 1.38% for the US10Y would be an automatic trigger to reduce any exposure.

3. CFTC Analysis

Latest CFTC data showed a positioning change of -12940 with a net non-commercial position of -76634. The past few days of price action in the JPY was mostly driven by the excessive moves we saw in yields on the US side, with US10Y continuing to grind higher, but was also exacerbated by risk on flows as well as rising oil prices which is a negative driver for Japan for its terms of trade. Even though the bias for the JPY remains firmly tilted to the downside, the move is looking stretched, and with both large speculators and leveraged funds firmly in netshort territory the odds of some mean reversion has increased, and we would prefer waiting for some of the froth to mean revert before looking for new JPY shorts. As always, any major risk off flows can still support the JPY, especially with quite a sizable net-short position still built up in the currency for large speculators as well as leveraged funds.


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