Updated: Mar 28, 2021
Have we had enough of COVID yet? Lockdowns are being extended once again, Vaccines are having less impact the more we research them and businesses continue to struggle. All of these factors should have our alarm bells ringing for a RISK OFF environment, investors move money from risky assets to safe assets.
That being said, what's more risky, Canadian Dollar or the Japanese Yen? If you said the Yen you're on the right tracks...
But.. what is the data saying? It's all good following the news but we're about getting into the data to get an unbiased outcome.
High Level Fundamental Overview
Overall, there are a few grey points and a couple indicators and factors that are going against our long on CADJPY. The two neutral indicators were interest rate differentials and COT report for CAD this is because the data hasn't shown any significant moves over the past couple weeks at minimum. The red ones are disagreeing with our long idea so we need to account for this in our decision making.
Currency Strength Meter - Logikfx
Overall on the currency strength meter, we can see the blue line being the CAD showing strength in fundamental data since the 19/12/2020. Since then we saw an appreciation in CADJPY of around 1%, however, now that fundamental data is showing an overall bullish signal we can be more confident on an upside move if this trend continues. On the flipside we had the opposite happen for JPY, it fell from a positive economic macro score of 27 no down to nearly -20!
This is a great sign for an upside reversal after down trending for some time.
GDP Differential 2020 Forecast
Moving onto our GDP Differential Indicator we're seeing our red traffic light coming into play. This means that the GDP growth rate forecasts are against our views that CADJPY should rise. Why? The change in differentials is slowing, this year we're expecting a potential upside move due to a wide spread in Canada growth rates and Japan growth rates but in 2022 it's expected to start to close meaning a potential downward pressure on the exchange rate. However, with the current year just starting the 2021 growth rates are promising.
Crude Oil vs CADJPY
Overall, we understand that when trading CADJPY crude oil is one of the most important commodities. If you're a novice trader you probably don't know why so let's go through the reasoning. Canada is one of the largest oil exporters of crude oil in the world, it's currency exchange rate is very volatile in relation to the oil prices. On the flipside Japan doesn't produce their own oil (or not enough of it), they buy it all from different countries. This means that crude oil has one of the most powerful relationships when trading CADJPY.
The overall correlation between crude oil and CADJPY is a positive correlation of about 21%. However, just looking at the price charts the past 2 years, they're near identical! Oil has been climbing over the past few months now and so has CADJPY and it's a core reason why import/export analysis is green.
Toyota vs CADJPY
Toyota is always a factor which we analyse when trading JPY pairs, car products are a huge export in Japan and they're one of the most global and competitive car manufacturers out there. Overall, we have a 30% correlation with CADJPY which is surprisingly stronger than WTI. The past month from Nov to Dec there was a huge 12% gain in Toyota which also saw CADJPY follow suit.
This month however, we're seeing a pullback of around 3% which is a little bearish for this idea as of currently but overall from Nov to now the gains have been huge. So it will be good to keep an eye on to see if this continues to fall or continues to rally.
TECK vs CADJPY
Teck Resources limited is one of Canadas biggest and most diversified mining companies. It engages in mining in several areas from energy, copper and most importantly coal. Japan buys a lot of coal across the world and Coal prices/ companies that depend on it will have a huge impact on the CADJPY exchange rate.
What was really interesting is that we saw a negative -30% correlation between CADJPY and TECK. This is like a polar opposite correlation to what we had with Toyota. The sharp rise will likely see a pullback soon which will be nice for our CADJPY idea, waiting for this to happen could be a nice catalyst we're waiting for to trigger the bulls.
Interest Rate Differentials
Overall, not much going on with interest rates. Like the other central banks across the world interest rates are heading to zero and no central bank is willing to lift the lever yet. The low interest environment is used to help stimulate the economy by making lending cheap. This means cheaper mortgages, cheaper loans and cheaper credit. This helps the people and businesses spend in the economy but as we can see there's not been much going on so that's why it's grey and neutral.
S&P/TSX (JPY) vs CADJPY
Overall, the TSX has had quite a fair run since the initial downside move in march. What we're seeing is that the TSX priced in JPY is looking strong. The overall wealth in Canada is looking stronger in comparison to Japan. This outlook makes investors look to hedge their assets from inflation, how so? Longing CADJPY.
Commitment of Traders - Open Interest Analysis
Overall, you can see why CAD was neutral because the pink line is sitting on zero. It's flat and hedge funds have no bias on the CAD so far. Any, deviations however will be super impactful as this could signal the direction hedge funds want to scale into!
JPY on the other hand we see a net open interest in the positive region, a good point from this though is that it's been falling down since last week which means investors are getting out of their JPY longs.
Price Trends - Basic Technical Analysis
Overall, we can see the price trends reach strong weekly levels of support in red. It's now reaching a potential point of reversal on a trendline but it broke it slightly before falling slightly. The third green arrow on the right is the area in which buyers are likely to come in if the trend line gets broken on the upper side.
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