Loonie Leads the Pack

It’s Friday, so you know what that means? Well, certainly not what it I used to given the ongoing lockdowns and social restrictions around much of the world. However, one thing is still the same; it’s time to take account of our winners and losers over the week.

Looking around this week and talking with other traders there are a couple of big moves that have been grabbing attention such as the 6% rally in Amazon shares, fuelled mainly by the stellar earnings beat posted this week. However, the move I want to focus on which is what the FX traders have all been either slapping their backs or kicking themselves over, is the almost 3% rally in CADJPY. So, lets’ take a look at what happened and why this was a great trade.

What Caused the Trade?

We’ve touched on this before but this week’s trade was a classic case of strongest currency versus weakest currency. CAD has been the strongest gainer against the Dollar while JPY has been the runt of the litter this week. Keeping an eye on currency strength intra-week and over long periods is a great way to get a view on when trends are starting.

Central Bank Divergence

So, the big point to note here is the divergence between these two central banks. The BOC has just started tapering its monthly asset purchases in light of the economic recovery underway there and in the US. With the country’s vaccination program gathering speed and re-opening progressing, the bank has taken a very optimistic view on the economic outlook and with the announcement of tapering has come the repricing of rate hike expectations. The BOC announced this month that it now sees lift off in 2022, not 2023 as originally projected.

On the other hand, the BOJ this month reaffirmed its commitment to keeping easing in place and even lowered its inflation forecasts over the horizon time frame. The bank cited the ongoing uncertainty in its outlook (Japan is currently fighting a third wave) and noted the need to keep easing in place and even extend if necessary. So, these divergent central bank views have created the perfect springboard for CADJPY as noted in a recent Market Spotlight.

So, now you know the score behind this trade and as always, if you caught it? Well done! If you didn’t? there’s always next week!Let’s take a look at the technical picture on this one.

Technical Views

CADJPY

The false break off the 86.10 level support cleared out weak stops before reversing and turning sharply higher. Price has now broken out above the 88.21 level and is on course to test the 89.24 level and the bull-channel top next. This will be a key challenge for bulls and a break here will pave the way for a much broader topside run.

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