The CAD/JPY pair is one of my favorites currently. This is because the Bank of Japan has been very open about the fact that it is going to expand its massive monetary policy. Weakening the Yen seems to be one of the most important jobs of the central bank going forward. The fact that the inflation target is going to be between 2% and 3% suggests that the bank will be printing Yen left and right. In other words – we are going to see a weaker Yen over time.
The Canadian dollar reflects not only a “risk on” currency, but it has a higher yield than the Yen. In a sense, it is a return to the old “carry trade” days when we would simply buy the higher yielding currencies with the lower yielding currencies like the Yen. Many of you won’t remember this time period, but needless to say – it was easy money. I am excited to think that we may be heading back in that direction again. Happy day are here again indeed!
Oil can also play a factor
The oil markets can obviously push the value of the Canadian dollar higher as well. This helps because once the Americans get a deal for the so-called “fiscal cliff”, we should see higher valued commodities, oil included.
The price of oil is especially interesting to someone trading this pair because Japan has to import 100% of its oil while Canada is a big exporter of oil. With this in mind, any “risk on” attitude will continue to push this pair higher. Also, there is the bond market and the fact that the yields in the Japanese Government Bonds as cratering because of BoJ purchases. Contrast that with Canadian bond yields, and you have a strong case for money leaving Japan, and heading towards the Great White North.
With this being said, I am long of this pair already, and have become even more interested in going long with a larger position on a break of the 85.50 level. I also think the 85 level should continue to offer support going forward also.