Upbeat capacity utilization rate turns Loonie bullish

Last week, the Canadian dollar fell against the Yen, after the Bank of Canada left the overnight benchmark interest rates unchanged at 1%.

While the decision was on expected lines, the market was disappointed due to the lack of hint about future interest rate hike.

Still, in the week ahead, I expect the CADJPY pair, which is currently trading at 88.30 levels, to turn bullish due to the facts presented underneath.

At a conference in Switzerland, the Bank of Japan’s Governor Haruhiko Kuroda stated that the recent improvement in the economy and overall changes in the financial system could trigger a rate hike in the bank’s yield targets.

Further Kuroda stated that the central bank of Japan has taken notice of the poor financial condition of the regional banks, which are bleeding due to the ultra loose monetary policy. However, Kuroda stressed that the current shape of the yield curve is appropriate. That means the Bank of Japan does not intend to raise the interest rates anytime now.

While deploying the quantitative easing program in 2013, Kuroda had said that he would do whatever it takes to achieve the inflation goal of 2%. Having failed to bolster inflation through the asset purchase program, the Governor started targeting the interest rates last year. The central bank now maintains a negative interest rate of 0.1% and the 10-year bond yield around zero percent.

Commenting on Kuroda’s statement, Masayuki Kichikawa, a strategist at Sumitomo Mitsui Asset Management, stated that he expects the BoJ to abolish negative interest rates only in the first-half of 2019. The economic recovery, after decades of stagnation, also supports continuation of the current fiscal policy.

Jackie Marvella

The Q3 GDP growth of Japan was upwardly revised to 0.6%, from the prior estimate of 0.3%. That triggered a recovery in the Nikkei Index, which rose 1.4% to close at 22,811.08 on December 7. The reversal in the Nikkei index has also turned the Yen weak as the former shares an inverse correlation with the safe haven asset. The Canadian dollar, in the meanwhile, has turned bullish due to a strong housing data and an upbeat capacity utilization rate.

According to Canada Mortgage and Housing Corporation (CMHC), the Canadian Housing Starts increased to 252,000 in November 2017, from 223,000 in October. Analysts had expected a figure of 214,000.

Similarly, the Capacity Utilization Rate increased marginally to 85% in the third-quarter, from 84.3% in the earlier quarter. The fifth consecutive quarterly increase was driven by construction, and electric power sectors. Thus, dovish stance of Kuroda has turned the Yen weak, while strong economic data keeps the Loonie bullish.

The CADJPY pair has bounced off the support at 86.75, as shown in the price chart below. The rising stochastic oscillator also confirms bullishness in the currency pair. Thus, I expect a bullish reversal in the CADJPY pair.

In order to gain from the probable uptrend, I am planning to go long in the CADJPY pair near 88.30, with a stop loss order below 87.30. If the pair rallies as expected, then I will book my profit near 90.30.

I may also invest in a call option to boost the returns from the analysis. The option contract should be valid until Dec 19. Before investing through the platform of a reputed binary broker, I will make sure that the currency pair trades near 88.30 in the spot market.

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