The Canadian dollar has been able to benefit from the rise in oil prices despite a weak economy. With the gains fading this week, the Japanese yen may be ready for a revival.
CADJPY: Daily Chart
CADJPY bounced off resistance at 108.50 this week, and big news in commodities this week was a surge to 10-month highs in oil. An extension to Russian and Saudi Arabia’s production cuts meant that traders rushed to buy oil, which surged to $87 and was helped by lower US inventories.
The Canadian dollar had some benefit from the move higher in oil but was hit by the latest comments from the Bank of Canada. Bank of Canada Governor Tiff Macklem said this week that interest rates may not be high enough to bring inflation back to target. Market analysts were expecting the BOC to halt all interest rate rises and were forced to reconsider.
However, after the central bank held rates at 5%, markets did not add a premium to the Canadian dollar. Macklem said in a speech that one reason for inflation staying above target was that it may take longer for rates to work but also that “monetary policy is not yet restrictive enough to restore price stability.
He added, “And unfortunately, the longer we wait, the harder it’s likely to be to reduce inflation.
The central bank added a quarter point in both June and July in a bid to cool inflation, but Macklem said that now “there is little downward momentum to underlying inflation.
Ahead of Friday trading, markets will get to see a final number for Japan’s second quarter GDP, which is expected to be 5.5% on an annualised basis. Traders will realise that with a Canadian dollar that doesn’t react to oil, rate hike pressure adds a headwind. Then there is the potential of the yen in a world where China may be clamping down on US tech companies like Apple.
