CAD/JPY Extends Gains Toward Late 110.000 Levels As Upbeat Japanese Macro data Gets Overshadowed
Key Takeaways:
- CAD/JPY cross gained positive traction on Wednesday during the Asian session
- Hawkish BoC expectations extend support to the Loonie and help cap the downside for the CAD/JPY pair
- Better-than-expected Japanese Trade Balance data gets greatly overshadowed
On Wednesday, the CAD/JPY pair extended the recovery momentum from a one-week low/110.675 level to a late 110.000 level during the mid-Asian session, marking a third consecutive positive gain.
The Canadian Dollar's (CAD) impressive performance against the Japanese Yen (JPY) in the last three trading sessions could be attributed to the latest Canadian inflation data report, which, despite showing inflation slowed down in Canada last month, headline inflation remained well above the Bank of Canada's (BoC) 2% target which suggests policymakers could stick to higher rates for longer to rein in inflation in Canada.
A Statistics Canada report released on Tuesday showed the annual inflation rate in Canada fell to 2.9% in January 2024, the lowest since June, from 3.4% in the previous month, and well below market expectations of 3.3%. From the last month, consumer prices were unchanged, with a 0.3% decrease from December 2023.
The annual core inflation rate in Canada, which excludes eight of the most volatile components such as food, energy, and mortgage interest costs, eased for the second month to 2.4% in January 2024, the lowest since April 2021, from 2.6% in the previous month. Every month, the core CPI index in Canada rose by 0.1% month-over-month in January 2024, following a 0.5% fall in the prior month.
Further underpinning the Canadian dollar and helping exert some upward pressure on the CAD/JPY pair was the modest rise in crude oil prices on Wednesday, buoyed by rising geopolitical tensions.
That said, the combination of positive factors, to a greater extent, overshadowed a better-than-expected Japanese Trade Balance data report released earlier today. Japan's trade deficit narrowed sharply to JPY 1,758.311 billion in January 2024 from JPY 3,506.43 billion in the same period of the prior year, compared with market consensus of a gap of JPY 1,925.9 billion, a Ministry of Japan report showed. Exports rose by 11.9% yoy to JPY 7,332.65 billion, the most in 14 months, supported by robust demand from the US and China. Meanwhile, imports fell by 9.6% to JPY 9,090.97 billion, the tenth consecutive month of drop, weighed down by lower energy prices.
In the future, investors look forward to the Canadian docket featuring the release of the New Housing Price Index (MoM) (Jan) data report. The data might influence the CAD price dynamics, which, along with the broader market risk sentiment, should allow traders to grab some short-term opportunities around CAD/JPY.
Technical Outlook: Four-Hour CAD/JPY Price Chart
From a technical standpoint, a further increase in buying momentum will uplift spot prices toward the pivot level (P) at 111.176. A clean move above this level will pave the way for further gains around the shared currency. The following relevant resistance level is at the 111.626 level, above which the CAD/JPY pair could rise further to retest the key resistance level plotted by an upward ascending trendline extending from the early February 2024 swing to higher highs. A convincing move above this level would reaffirm the bullish bias and act as a fresh trigger for buyers to place new bids, further helping the CAD/JPY pair increase in value. The CAD/JPY could then move to encounter the 112.218 hurdles, about which, if bulls manage to breach this ceiling, attention will shift toward the 113.000 round mark.
On the flip side, if sellers return and spark a bearish reversal, initial support comes in at the 110.735 level (S1), followed by the previous YTD low at 110.675. On further weakness, the CAD/JPY price could drop toward the horizontal support level at 110.570. A decisive move below this level would pave the way for an accelerated drop toward the 110.130 support level en route to the technically strong 200-day (brown) Exponential Moving Average (EMA) at 109.959.
