Two key political stories could help drive CAD/JPY higher in the short-run. All the yen crosses remain vulnerable to a safe-haven market moving event, but right now we could be entering a small period of calm until the Oct. 10 U.S.-China high level trade talks.
It seems Democratic senators are looking to get the North American trade pact wrapped up, potentially delivering a much-needed win in red states. Democrats do not want the impeachment inquiry, which ultimately seems set to end at the Senate, to be the main reason USMCA does not pass. If the U.S. Congress passes the deal quickly, we could see both the Mexican peso and Canadian dollar rally.
Some analysts have downgraded their estimate of the likelihood of the USMCA passing due to the impeachment inquiry, but it seems Democrats need this ratified more than the president. Currently, only Mexico has ratified the agreement.
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Another big driving factor for the Canadian dollar is the recent volatility we have seen with oil prices, their largest export. West Texas Intermediate crude has now wiped away all the gains that stemmed from the Saudi oil field attacks. This key oil price gap has now been filled within two weeks and it seems price is tentatively finding support. The recent leg lower with crude prices occurred after Saudi Arabia agreed to a partial cease-fire in Yemen. This four-year war is unlikely to be ending soon and the risk premium is likely to return to crude prices.
The Canadian dollar could see a couple of tailwinds help drive it higher in the short-term.
The Japanese yen got crushed after the last tax hike and many investors are nervous the Oct. 1st 2% sales tax increase to 10% will cripple an economy that has already lost a ton of momentum. A fiscal pressure will likely derail a lot of the stimulative measures the BOJ has been delivering. The yen could remain vulnerable as recession risks will surge as consumer spending tumbles. We could very well anticipate a similar reaction to the yen that occurred during the 2014.
While geopolitical risks globally remain elevated, if we do not see a major risk-off scenario, the yen should remain vulnerable here.
Price action on the CAD/JPY daily chart shows today’s rally has cleared the 100-day SMA. If we see further upward momentum, initial resistance could come from the 83.00 region, which is where we could see the formation of both a double-top pattern and a bearish ABCD pattern. If valid, we could see a modest pullback before we see the next leg higher.
If price is unable rally above 82.00 region, key support lies at the 80.50 region.
