Jun 07, 2023

A Canadian interest rate decision and Japanese GDP will test recent CAD strength.

CADJPY – Daily Chart

CADJPY – Daily Chart

CADJPY has been on an uptrend since March and is pushing toward the 105 level. The economic data will determine whether the current trend continues or leads to a reversal. 

According to economists polled by Reuters, the Bank of Canada is expected to keep its key interest rate on hold at 4.50% on Wednesday and for the rest of this year. However, they admitted a high chance of one more rate hike. 

Inflation is still running at twice the BoC’s 2% target, while a strong job market and economy are reasons why the BoC may add at least one more rate hike. There are also growing expectations of another Federal Reserve rate hike which could relieve pressure on the BoC to pause. 

“Given that rates are already elevated, it can afford to wait until July, when it’s due for a forecast update, to decide if it actually needs to tighten further,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

“We’re still hopeful that upcoming employment and inflation data will be tame enough to keep the Bank on hold this year but concede that the risk of a further modest dose of rate hikes has risen.” 

Japan’s economy will see the release of GDP data on Wednesday and is expected to show the economy grew more than initially estimated for the first three months of this year. Revised GDP data is expected to show the world’s third-largest economy grew at an annualised rate of 1.9% in the first quarter, higher than the first estimate of 1.6%. 

According to analysts, a forecast 1.3% increase in capital expenditure, which was more significant than the provisional 0.9% rise, would be the primary driver of the upgrade. Ministry of Finance data showed Japanese firms increased spending on plant and equipment in January-March at the fastest rate since 2015. 

“Manufacturers’ investments are growing vigorously on top of non-manufacturers’ spending, suggesting that the global manufacturing downturn has not brought big impacts to Japan,” SMBC Nikko Securities analysts said.

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