CADJPY Breaks Out

The first week of the final quarter of the month comes to a close and it’s been a much quieter one in FX markets. Compared with the volatility we’ve seen over recent weeks, moves have been far more stunted this week. However, there is till room for this to change, given the US labour reports due later. Chatting with traders this morning, however, it seems this week was something of a stop gap with traders in wait and see mode over several key themes. In terms of the moves that have capture attention, however, it seems the oil-driven CAD rally is the main focus; specifically the roughly 2% rise in CADJPY. So, let’s take a look at what caused the move and, as ever, if you caught the trade? Well done! If not? There’s always next week.

What Caused The Move?

Oil-Fuelled Rally

The main driver behind the current upside action in CAD is the surge in oil prices. The global energy crisis has sent demand levels soaring, at a time when supply chain issues are creating a deficit in meeting this demand. Additionally, COVID related issues have added further difficulty, causing the loss of some suppliers and distributors along the way. In light of this, crude prices are surging higher and taking the Canadian Dollar with them.

The global inflationary rise is coming into sharper focus as a result of this current crisis which, at best, looks set to continue across the remainder of the year at least. With this in mind, traders are now ramping up their BOC tightening expectations. The bank recently paused its QE tapering operations though traders now suspect tapering will be stepped up at the next meeting in order to curb spiralling prices.

JPY On The Backfoot

On the JPY side, the BOJ’s recent downgrading of the economic outlook there is doing little to inspire any upside in the currency. The disparity in the market’s outlook for BOC and BOJ policy action is creating room for further CADJPY upside here. While typically a strong safe haven play, the current rally in risk assets, fuelled by higher energy prices, is causing an absence of demand, despite the recent collapse in the Nikkei, keeping JPY muted for now. So, that’s the fundamental backdrop, let’s take a look at the technical view.

Technical Views

CADJPY

The breakout above the corrective bear channel has seen the market eclipsing the 88.21 level with price now challenging resistance at 89.24. With both MACD and RSI indicators turned higher here, the focus is on further upside towards the 90.65 level next.