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CAD/JPY: Global Reflation and Commodity Prices May Support the Canadian Dollar in 2021

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CAD/JPY: Global Reflation and Commodity Prices May Support the Canadian Dollar in 2021
  • The Japanese yen has lost 2.05% against the Canadian dollar since the start of 2021.
  • The Canadian dollar may find new support owing to higher commodity prices such as oil.
  • Japan’s tourism restrictions may cause further economic contractions in 2021.

The CAD/JPY trading pair has worked hard to overcome the pandemic volatility where it hit 52-week lows of 73.82 in April 2020 to highs of 84.75 in February 2021 (+14.81%). The rally of the Canadian dollar is expected to continue with the recovery of the global economy. Investors are upbeat that the Bank of Canada may lower the economic stimulus spending to stir growth and increase rates. Further, the increase in oil prices has continued to spur the demand for the currency.  

Japan is Canada’s trade partner with both countries members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Almost 500 million people are represented in this trading bloc with a GDP of CAD $13.5 trillion (13.5% of the global GDP).

CAD/JPY chart

The CAD/JPY currency pair traded at a high of 88.09 when the CPTPP was signed by the first six countries in 2018 – Canada and Japan included.

Oil, Canada’s major export commodity, is close to hitting the $60 a barrel threshold. This weekly price has not been attained since October 2020. In 2019, the value of crude oil exported from Canada totaled $68.053 billion, followed by automobiles at $40.70 billion. Mineral fuels exported from Canada hit approximately $100 billion into 2020 (about 22% of the export commodities from Canada). The year 2019 saw WTI crude price reach the highs of $65 while Brent Crude was $74.04 in April. Increased win oil price will increase the value of commodities exported from Canada.

WTI crude oil

WTI crude oil traded at $56.85 while Brent hit $59.34 a barrel as at February 5, 2021. Investors are bracing for a tight market with natural gas prices at $3 MMBtu.  

Japan’s restrictions

Since the start of 2021, the Japanese yen has lost 2.05% against the Canadian dollar. Japan has extended its state of emergency against foreigners to March 2021 to help contain the novel strain of Covid-19. The restrictions will affect the country’s tourism industry that is worth $45 billion (as of 2018). Japan relies more on domestic tourism expenditure as compared to foreign visitor spending.

Japan relies more on domestic tourism expenditure as compared to foreign visitor spending.

Approximately 19% of expenditure is attributed to foreign visitors while the other 81% is spent by local tourists. In less than 15 years, Japan’s tourism revenue has grown by more than 275%.

Japan’s tourism revenue has grown by more than 275%

This situation explains why the Japanese government has extended restrictions to curb foreigners’ entry into the country.

Canada’s Ivey PMI released on February 5, 2021, indicated that the country’s economic activity contracted in January 2021. The index (seasonally adjusted) had risen from 46.7 to 48.4. The PMI reading below the 50th mark indicates a contraction despite the rise in the number. There was a surge in the price index from 66.9 (in 2020) to 82.8 (in 2021), while the employment gauge fell from 45.8 in December 2020 to 41.5 in January 2021.

Technical analysis

CAD/JPY Technical analysis

The upward path of the CAD/JPY trading currency shows a bullish pattern in favor of the Canadian dollar. The 14-day RSI is at 68.803, indicating a strong buy position of the pair. The 50-day moving average gives new support at 82.31 while the EMA is at 82.34.

The Bank of Canada’s hold on the interest rate at 0.25% until 2023 may not be sustainable with global reflation. Support of commodity prices like oil may initiate positive growth of the economy in 2021.

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