Following the unexpected rate hike announced by the Bank of Canada last week, the Canadian dollar rallied against the G10 rivals, including the Yen. Even the thermonuclear fusion weapon test by North Korea did not deter the Canadian dollar from rising against the Yen. The CADJPY pair, which had gained about 200 pips in the past one week to trade at 90.20 levels, is expected to rise further due to the reasons given below.
The Cabinet Office of Japan stated that core machinery orders rose by a seasonally adjusted 8% to ¥853.3 billion in July, following a 1.9% decline in the earlier month. Analysts had expected only a 4% increase in core machine orders. However, on a yearly basis, core machinery orders plunged 7.5% in July. In the previous month, core machinery orders had declined 5.2% on a y-o-y basis.
Similarly, the M2 money stock in Japan rose 4% y-o-y to ¥978 trillion in August. The figures reported by the Bank of Japan were a notch lower than the 4.1% increase anticipated by analysts. In July, the M2 money supply increased by 4%. M2 money supply refers to the change in the total quantity of domestic currency in circulation and deposited in banks. During an early economic cycle, a positive change in the money supply leads to an increase in consumer spending and investment.
Investors were also relieved to note that North Korea did not resort to any missile or nuclear tests on the 69th anniversary of its founding. Additionally, the UN also unanimously passed additional sanctions on North Korea. The move is widely seen as a measure to restrict Pyongyang from carrying out new tests and bring it to the negotiating table. The developments have considerably decreased the demand for safe-haven assets, as of now.
In Canada, contrary to market expectations, the Canadian Mortgage and Housing Corporation reported an increase in the housing starts to 219,447 in August, from 217,339 units in July. Analysts had anticipated 216,000 housing starts for August. For the eighth consecutive month, housing starts have gone above the 200,000 unit mark.
Bob Dugan, a chief economist of CMHC, stated that the demand for new homes remains strong and consistent with a decade of high consumer confidence. The recent rate hike, a decline in the unemployment rate and strong housing starts data is expected to keep the Canadian dollar bullish against the Yen, which has turned weak due to an increase in risk appetite.
The CADJPY pair is moving within the ascending channel as shown in the image below. The currency cross is also trading above its 50-period EMA, while the momentum indicator is making higher lows. So, we can infer that the uptrend is intact.
In order to gain from the probable uptrend, we wish to open a long position in the CADJPY pair near 90.20, with a stop-loss order below 89.10. We would like to exit the position near 91.80 where the next resistance is expected.
A high or above option can also be traded under the current scenario. We may invest when the CADJPY pair changes hands near 90.20. Additionally, a contract expiring on or around September 21st will be chosen for trading.
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.
