The year has not gone well for the Canadian dollar, so far. Trade-related tensions with the US, 54% y-o-y decrease in foreign direct investment, and 17% y-o-y decline in business capital expenditures are keeping the Canadian dollar weak against its rivals, including the Japanese Yen. Since January 5, 2018, the CADJPY pair had fallen from 91.50 to 80.60. We expect the downtrend to continue in the current week due to the arguments presented below.
According to Statistics Canada manufacturing (or factory), sales declined 1% to $54.9 billion in January. Declines in the motor vehicles, primary metal industries, and aerospace products were responsible for the drop. Sales decreased in 14 of 21 industries, representing 56% of the Canadian manufacturing sector. While sales of durable goods fell 3.5% to $28.20 billion, sales of non-durable goods increased 1.7% to $26.80 billion. Analysts had expected manufacturing sales to decline by 0.8% only. Last month, manufacturing sales recorded a decline of 0.1%.
While giving a speech on the modern labor market at Queen’s University in Ontario, Bank of Canada’s governor Stephen Poloz stated that youth participation in the labor market could be improved further. The statement has raised concerns that the central bank could raise interest rates at a much slower pace than earlier thought.
The country got a lucky break when the US President exempted the country and Mexico from new steel and aluminum import tariffs of 10% and 25%, respectively. Canada ships about $12 billion worth of steel to the US. However, the relief may be short lived as Canada’s Prime Minister Justin Trudeau is reported to be planning similar tariffs on imports. The tariffs are being planned to ensure the country is not used as a temporary storage yard by foreign steel producers seeking to evade the additional levies.
Over the last few years, regulations have become cumbersome in Canada. Many oil and gas projects have been abandoned in the past three years and experts fear that it is impossible to complete a pipeline project (with approval from the National Energy Board) successfully at this point in time. While Canada is struggling to maintain the inflow of investments, Japan is expected to see a huge inflow by the way of repatriation from the country’s enterprises.
To report strong financial health, Japanese multinational companies generally repatriate cash in March. This process usually keeps the yen strong in March. Minori Uchida, an analyst at MUFG confirmed this view in a report on the underlying bullishness in the yen. Uchida stated, “Japanese corporates will likely want to convert funds to yen with the end of the fiscal year approaching.”
Furthermore, MUFG also expects fund managers to step up the repatriation of dividends from foreign-owned shares ahead of year-end. Uchida is of the view that the primary income surplus tends to rise from high dividend repatriation in February and March.
Uchida also expects Japanese investors to refrain from making overseas investments at the end of the financial year (March 31). Even the US Treasury bonds are no longer attractive as they had been in the past. This has reduced the outflow of yen from the country.
Technically, the CADJPY pair is declining after facing resistance at 88.80. The next major support for the currency cross is only at 78.80 levels. The stochastic oscillator is also in the bearish zone. Therefore, we are forecasting the CADJPY pair to undergo a deeper decline.
As a Forex trader, we wish to establish a short position in the CADJPY pair near 81.20. To minimize risk, we would certainly place a stop-loss order above 82.40. Once a short position is opened, we would place a buy order near 78.80 to book profit.
We may also consider investing in a put option offered by a binary broker. However, a contract that remains active for a period of one week is required. Additionally, the CADJPY pair should be trading near 81.20 at the time of purchasing the put option.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
