The Canadian dollar has outperformed in recent weeks. That’s despite ongoing weakness in crude oil, which is Canada’s main export commodity. So, what’s driving the CAD higher?
Expectation about tighter monetary conditions in Canada, after the Bank of Canada delivered a strong hint a couple of weeks ago about raising interest rates. Those expectations could be revised however in the event crude oil falls furthers and stays weak, or if incoming data deteriorates once again. Yesterday though, crude oil bounced back and data from Canada – retail sales – topped expectations. This supported the CAD recovery further.
Today the focus will be on Canadian inflation figures, due in at 13:30 BST. Headline Consumer Price Index (CPI) is seen rising 0.2% month-over-month in May after a 0.4% increase the month before. It is also worth keeping an eye on other measures of inflation, including core, common, median and trimmed versions of CPI.
Unless the Canadian inflation figures turn out to be notably weaker than expected, the Canadian dollar should remain supported as expectations about tighter monetary conditions would only rise with improving data and rising price levels. Another key question to consider is which currency to pair the CAD with. CAD bulls would want to focus on a currency where the central bank is still pretty much dovish – for example the CHF, JPY or the EUR. Conversely, CAD bears may wish to target a currency where the central bank is hawkish – for example USD and GBP.
With CAD turning bullish, it is only right we paired it against a currency where the central bank is still dovish. How about the Japanese yen? The chart of the CAD/JPY is actually looking very constructive. As can be seen, the long-term trend line which has been in place since the year 1995, held again in the second half of last year. This resulted in a rally which caused a break of the medium-term bearish trend line. Since the middle of December however, the CAD/JPY has been declining. But in recent times, it looks like the pair has stabilised around its 50- and 200-day moving averages. With the CAD/JPY holding above these rising moving averages, the trend is clearly and objectively bullish even if it appears we are stuck in a consolidation pattern.
Given the above fundamental and technical factors, I am expecting a bullish breakout to emerge on the CAD/JPY, possibly as early as today – provided that Canadian CPI and crude oil cooperate. If and when we clear the 84.20 resistance level and move above the next immediate hurdle around 84.80 then the bullish trend may gather momentum and price could potentially accelerate towards last year’s highs near 89.00. But in the event that the CAD/JPY breaks below supports at 83.30 or 82.45, then this would raise some question marks about the short-term bullish trend.
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