Sep 08, 2023

The Canadian dollar has appreciated despite a weak economy, benefiting from rising oil prices. However, with the recent decline in oil prices, the Japanese yen may be poised for a rebound.

CADJPY Daily Chart

CADJPY: Daily Chart

The Canadian dollar to Japanese yen exchange rate (CAD/JPY) rebounded from resistance at 108.50 this week. A major news story in commodities this week was a surge in oil prices to 10-month highs. An extension to production cuts by Russia and Saudi Arabia led traders to rush to buy oil, which surged to $87 per barrel and was helped by lower US inventories.

The Canadian dollar received some support from the rise in oil prices, 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 had been expecting the Bank of Canada to halt all interest rate hikes, but were forced to reconsider in light of Macklem’s comments.

Markets did not, however, raise the value of the Canadian dollar when the central bank kept interest rates at 5%. The fact that rates might take longer to start working and that “monetary policy is not yet restrictive enough to restore price stability” are both contributing factors, according to Macklem, to inflation remaining above goal.

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.”

Prior to Friday trading, markets will receive the final figure for Japan’s second-quarter GDP, which is anticipated to be 5.5% on an annualised basis. Traders will realise that with a Canadian dollar that does not respond to oil, rate hike pressure adds a headwind. There is also the potential of the yen in a world where China may be clamping down on US tech companies like Apple.

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