USD/CAD v/s CAD/JPY for CAD Strength

USDCAD Price Chart


CAD, USD/CAD, CAD/JPY Talking Points:

  • The Bank of Canada surprised last week when announcing an end to their QE program.
  • USD/CAD is now backed by two central banks that are moving away from the uber-loose policies implemented during the pandemic: For traders looking at trends with the CAD, there may be more amenable pastures away from USD/CAD, such as CAD/JPY or perhaps EUR/CAD.
  • The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.

It’s a big week for global markets. Not only do we continue to hear earnings reports out of the US, but the macro calendar is absolutely loaded for this week with both the Federal Reserve and Non-farm Payrolls on the docket.

The Canadian Dollar is coming off of a big week after the Bank of Canada surprised by announcing an end to their QE program. This happened on Wednesday and brought a strong push of CAD-strength into the mix, as USD/CAD dropped down for a test of the 1.2300 handle.

I had looked into the pair last Wednesday, as that rate decision was happening, looking into the potential for a reversal in the pair. As I had shared, if last week’s bar could’ve closed above the 1.2416 level, there’d have been a morning star formation on the weekly chart, a setup often followed with the aim of bullish reversals. And despite the fact that prices ended up holding support and Friday turned into a big day of US Dollar strength, the weekly bar did not close above 1.2416 and that formation did not activate on last week’s close.

Instead, the pair continued with the same range that had been in-play for the prior week and price action is continuing to digest October losses in the pair.

USD/CAD Daily Price Chart

USDCAD Price Chart

Chart prepared by James Stanley; USDCAD on Tradingview

CAD Alternatives

Given that the US and Canada are two of the more hawkish central banks at the moment, marrying the two currencies into a pair to look for a trend seems like a lackluster idea. Instead, traders may look to mesh either USD or CAD with a weaker currency currently backed by a central bank that’s not looking to tighten policy, such as Japan and the Yen, or perhaps the Euro.

CAD/JPY, in particular, can be interesting, especially given the oil proxy. October was a big month for the pair as price action jumped above the 90.00 psychological level on its way to fresh five, almost six year highs.

CAD/JPY Monthly Price Chart

CADJPY Monthly Chart

Chart prepared by James Stanley; CADJPY on Tradingview

CAD/JPY

The fundamental drive in CAD/JPY remains attractive, as the Bank of Canada is reacting to market movements by becoming more hawkish and responsive to inflation, and given the country’s oil exports it makes sense that continued strength in oil prices can bring even more inflation to the Canadian economy.

This runs in stark contrast to a Japanese Yen backed by a Bank of Japan that’s been sitting on negative rates for going on six years now. And if Canadian rates are going up while Japanese rates remain flat, the attractiveness of carry trades can come back and that can allow for even greater topside movement.

At this point, the trend is CAD/JPY is holding above support as taken from prior resistance, which lines up with the 23.6% Fibonacci retracement of the recent major move. This keeps the door open for bullish potential in the pair.

CAD/JPY Daily Price Chart

CADJPY Daily Chart

Chart prepared by James Stanley; CADJPY on Tradingview

— Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

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