Passive Interest Rate Moves May Confine Canadian Dollar, Japanese Yen To Range
As we know it, Japan's economy has been labeled recessionary given its two consecutive quarters of negative strength. July GDP data shows the North American country seeing some relief, expanding 0.7% in that month alone. With these two conditions in minds both monetary authorities are unlikely to react to growth as inflation is only now beginning to retreat. Rate cuts here would only add upward price pressure that these two banks have sought to avoid. As such, yield-gap neutrality may continue for the near future and thus see no changes in relative strength between the Canadian Dollar and the Japanese Yen.
Trading Tip - Financing the purchase of a currency with the Japanese Yen is generally a riskier endeavor in times of greater volatility. Recent weeks have shown financial market turmoil to be benefiting the Yen as a result. As a precaution, traders may want to wait for volatility before trading this range. In addition to a stop loss, we will look to control risk further by removing any unfilled orders by the end of the week or should spot close above 102.19 prior to our order being filled.
Event Risk for Japan and Canada
Japan - Between Monday and Tuesday the Bank of Japan will announce its decision for their benchmark rate. Consensus forecasts call for no changes as the BoJ continues to find itself in a tight situation where the overnight cost of borrowing is already at 0.50%. Japan's week will be highlighted instead by the minutes from September's central bank meeting. One may see Yen volatility ensue if the minutes reveal a sharper and more urgent tone among the bank's board members. But as oil and goods prices fell through August, we may see that the members had become increasingly dovish on the inflation front. Their monthly report will probably suggest the economy is indeed in a recession and will probably highlight the easing inflation. The country's Leading Index has been generally known to precede large deviations from trending economic activity. The metric which has been on trending decline since May of 2006 might continue to fall as spillover from the US financial crisis continues to impact global financial markets.
Canada - Of the two major events on Canada's calendar this week labor data will be of most concern. With Canada's economy depending so much on export and oil driven growth, the fall in crude may deteriorate the country's overall prospects. Despite commodity decline, GDP in July alone grew 0.7% for the North American country. If it indeed does find itself trending upward through August and September, labor data may come in stronger than expected. The Ivey Purchasing Managers Index, a volatile metric measuring the monthly change in purchases made by corporate executives, is expected to decline for a third straight month in September. Implications in the figure's actual outcome will be limited as Loonie traders take labor data as the paramount concern this week.
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