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  • CAD / JPY long as the interest rate differential begins to widen: Top Trade Q1 2022

CAD / JPY long as the interest rate differential begins to widen: Top Trade Q1 2022

By on January 1, 2022 0

The coming year will see a series of global central banks overturn their loose, pandemic monetary parameters of the decisions of the past two years and begin to normalize monetary policy by withdrawing emergency stimulus measures and raising interest rates. Major central banks, including the Federal Reserve, Bank of England, Reserve Bank of Australia and Bank of Canada, have already warned markets of what to expect in the coming months.

One central bank, however, that will not raise interest rates is the Bank of Japan, even though its short-term policy rate is 10 basis points in negative territory. In contrast, the Bank of Canada (BoC) is expected to raise its key rate by 25 basis points in January to 0.50% to stem inflation above target. And that will be just the start for the BoC, with markets now anticipating a total of 130bp of rate hikes in 2022, significantly widening the interest rate differential with Japan. This yield differential will emerge and weaken the CAD / JPY in a classic “high yield long currency / low yield short currency” trade.

CAD / JPY Weekly Price Chart – December 10, 2021

While this quarterly idea may be better suited for a longer time frame, the recent weakness in CAD / JPY provides an opportunity to enter trade at a better level than offered by previous weeks. The Commodity Chanel Index (CCI) has erased the extremely overbought positioning seen in mid-October on the weekly chart and is just starting to point higher again. The 50-day / 200-day sma cross gives the longer-term chart a bullish bias, while the last weekly candle broke a series of higher short-term lows. A break confirmed above 91.59 and 93.02 would pave the way for highs last reached in August 2015.

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