Later today, the Bank of Canada’s interest rate decision should trigger high volatility in the Canadian dollar (CAD) pairs. The market expects the central bank to stay on hold and keep the overnight rate at 5%.
Last Friday’s GDP and PMI data support the no rate hike possibility. However, the Bank of Canada is a central bank known for surprising markets. Also, the details at the press conference, to start one hour after the interest rate decision is made public, might mean more for the Canadian dollar than the actual interest rate hike.
Speaking of the CAD, it is oversold, especially against the US dollar. More precisely, USD/CAD rallied 3% since August. However, that might be exactly why it would be appropriate to consider other CAD pairs to trade during and after today’s Bank of Canada rate decision.
CAD/JPY has a hard time holding above 110An interesting currency pair to watch as the Bank of Canada’s interest rate decision is due is the CAD/JPY. This is a cross pair that moved in a bullish trend for more than three years.
It all started in 2020 when the cross traded at 75. Now, it trades around 109 after trying its hands twice at the 110 area.
CAD/JPY chart by TradingViewShorting the pair here is risky because it means trying to pick a top. However, the inability of the market to hold above 110 might offer a good enough reason to try shorting it.
That is particularly interesting, given the USD/CAD overbought levels.
More precisely, while the CAD extended its losses against the US dollar, those losses are not visible on the CAD/JPY pair. Sure enough, one may argue that the yen’s weakness, rather than the CAD’s strength, drove the cross pair higher. And that is true.
However, unless we see a daily or weekly close above 110, the path of least resistance is the downside. Traders should look for the bearish momentum to pick up once the market crosses the 105 and 100.
But that would probably be triggered by a JPY higher move rather than a weak CAD. In any case, if we are to see a bearish momentum, it should start either with the Bank of Canada today or with the Bank of Japan early next week.
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