CADJPY BUY Major central banks, including the Federal Reserve, the Bank of England, the Reserve Bank of Australia, and the Bank of Canada, have already given markets a strong heads-up about what is to come over the next few months.
One central bank however that will not be raising interest rates is the Bank of Japan, even though their short-term policy rate sits 10 basis points in negative territory. In contrast, the Bank of Canada (BoC) is expected to hike its cash rate by 25 basis points in January to 0.50% to stem above-target inflation. And this will be just the start for the BoC with markets now pricing in a total of 130bps of rate hikes during 2022, widening the interest rate differential with Japan markedly. This yield differential will show up in, and weaken CAD/JPY in a classic ‘long high yield currency/short low yield currency’ trade.
One central bank however that will not be raising interest rates is the Bank of Japan, even though their short-term policy rate sits 10 basis points in negative territory. In contrast, the Bank of Canada (BoC) is expected to hike its cash rate by 25 basis points in January to 0.50% to stem above-target inflation. And this will be just the start for the BoC with markets now pricing in a total of 130bps of rate hikes during 2022, widening the interest rate differential with Japan markedly. This yield differential will show up in, and weaken CAD/JPY in a classic ‘long high yield currency/short low yield currency’ trade.