Expect lots of choppy volatility, but with an upward slant.
The Canadian dollar pulled back a bit on Friday, reaching down to the ¥105 level. This is an area that would attract a certain amount of attention due to its large, round, psychological aspect of it. Ultimately, I think that we could go a little bit further, but a lot of this is going to come down to whether or not we can continue to see momentum come into the market.
This is an interesting pair for me, because the crude oil market has a huge influence on the Canadian dollar, as Canada is a major exporter of the commodity. As a general rule, if crude oil starts to rally, we will see a lot of bullish pressure on the Canadian dollar as well. On the other side of this equation, Japan imports 100% of its crude oil, so it does make a certain amount of sense that it has such a high correlation to crude oil.
Adding even more fuel to the fire is the fact that the Bank of Japan is doing everything it can to keep interest rates low, with the 10-year JGB target rate being 0.25%. In fact, the Bank of Japan has suggested that it is willing to buy “unlimited bonds” in order to keep this market down. That is the same thing as printing unlimited yen, so it makes sense that the currency will continue to struggle. At this point, I think most of the market pulling back is a reflection of an overstretched condition. However, we are still very much in a bullish market, and it does make quite a bit of sense that we will eventually see buyers come into this market to take advantage of value.
The 50-day EMA is approaching the ¥101 level and rising. The ¥102 level was the previous resistance barrier, so I think at that point we could see a little bit of support as well. This is a market that I think will continue to see a lot of upward pressure regardless of what happens next, with perhaps the lone exception being that if we get a complete “risk-off” type of environment, then sometimes the Japanese yen will become attractive. Either way, the trend is clear at this point. Expect lots of choppy volatility, but with an upward slant.
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