Rate hike expectations keep Canadian dollar bullish

According to a survey conducted by the Bank of Canada, the business outlook reading for the second quarter increased to 31, from the prior reading of 21. The survey indicates that business activity is gaining momentum and the firms are expecting an increase in sales in the months ahead. The survey also underlines the possibility of a labor shortage in the future.

The GDP data announced by Statistics Canada reflected the survey. According to the report, the Canadian economy grew 0.2% m-o-m in April. The economic expansion was in line with the market’s expectations, but slightly lower than the previous month’s GDP growth of 0.5%.

However, on a y-o-y basis, the economy recorded its fastest growth in three years, thereby increasing the odds of a rate hike by the Bank of Canada in the July monetary policy meeting.

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In Japan, the household spending declined 0.1% y-o-y in May, compared with a 1.4% decline in the earlier month. Analysts were expecting a much worse decline of 0.7%. The decline in the household spending is a cause of worry.

The core inflation increased 0.4% m-o-m in May, and in line with analysts’ expectations. It is the fifth straight month of increase in inflation. However, the unemployment rate increased to 3.1% in May, from 2.8% in the previous month. The market was not expecting any change in the unemployment rate. Thus, positive economic data coupled with a higher probability of a rate hike are expected to keep the Canadian dollar stronger against the Yen.

The price chart indicates that the CAD/JPY pair is moving towards the major resistance at 87.60. Technically, the MACD indicator is making new highs. Thus, a continuation of the uptrend can be expected.

On the basis of this analysis, we believe that it would be prudent to open a long position in the CAD/JPY pair near 86.40, with a stop loss order below 85.40. We would dilute our long position when the pair rises to 87.80 in the Forex market.

We also wish to bet on the uptrend by investing in a call option valid for a period of one week. A strike price closer to 86.40 is preferred for the trade.

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