CAD/JPY
Further Hike Speculation: Following earlier economic data pointing to soaring consumer prices, traders continued to speculate on further interest rate hike considerations pushing the Canadian major interest higher in intraday action. After reporting prices that soared 3.4 percent in the month of September, Bank of Canada Governor David Dodge issued statements to the House of Commons finance committee indicating that “economic growth in the first half of the year was somewhat stronger than” they had previously expected. As a result, further interest rate raises look to be expected in order to cap any rampant inflationary growth. As a result, experts are now anticipating two more rate hikes before year's end with the possibility of an over 3 percent benchmark rate by March 2006. Additionally, the governor indicated future intentions of raising the inflation target to 3 percent.
Carry Trade Repetition: As can be expected with interest rate speculation of above 3 percent, traders attempted to take advantage of the widening spread between Japanese denominated assets and Canadian investments. With consumer price inflation still relatively tepid in the world's second largest economy, sentiment still looms strong that benchmark rates will not rise in Japan till the middle of next year. Subsequently, given two more rate hikes in the Canadian rate before yearend, the spread would grow to 300 basis points in favor of the Loonie.
USD/JPY
Shrinking Merchandise Trade: Traders pared back positioning in the Japanese yen following a disappointing merchandise trade balance report. Japan's trade balance shrank as rising crude oil prices combined with domestic demand boosted the monthly import figure. Japan's exports rose 8.8 percent to a record in September on higher demand from the U.S. and China. As a result, the trade surplus narrowed 21 percent to 956.9 billion yen against the 832.6 billion consensus expectation. Japanese corporate service prices fell 0.6 percent from September 2004, beating Augusts' 0.8 percent fall and the consensus, which predicted a 0.8 percent fall as well.
PBoC Rebuttal: Officials of the People's Bank of China clarified earlier statements by central bank vice governor Wu Xiaoling that the yuan would appreciate inevitably. In a statement issued today, the central bank explained that “as China's economy continues to be strong, in the long run the appreciation of the yuan will be the tendency.” Traders received the statements as confirmation of no further revaluation initiatives for the year and pared back fresh long yen positions.
Technically Speaking: Consolidating once again at the formidable option related 116 resistance level, the currency looks to slightly pullback from today's massive retracement. In the event the aforementioned occurs, the first floor would be considered the 115.62 price figure (23.6 percent fib level from the two day wave). Currently a critical point, a penetration above the 116 would see potential long swings higher, potentially to 118.
EUR/CAD
Economic Anticipation: With no economic data on the day, traders pared back profitable positions sparked by a yesterday's better than expected Ifo institute survey. However, speculation may soon return as the market is expecting the German GfK consumer confidence survey being released tomorrow. Although somewhat expected to follow in the footsteps of the Ifo, any downside surprises in the GfK may offer fresh short opportunities in the single currency leg.
In Lock Step With The Major: Similar to the underlying major currency and the above-mentioned CADJPY cross currency pair, EURCAD traders attempted to capitalize on further carry trade opportunities. Although the euro zone does differ in that rates may ultimately rise from the currently offered 2 percent, a differential still exists between both denominations and would be further widened on hikes in the Canadian economy.
Technically Speaking: After forming a double top, the cross crashed through three Fibonacci levels before coming to a halt on the 61.8 percent fib level at 1.4112. Currently consolidating, further notions of downside activity loom as the stochastic oscillator, although forming nascent suggestions of a golden cross, remains bearishly downcast. A penetration of the current floor would ultimately lead to a test of the 78.6 at 1.4067. Topside resistance comes in at 1.4144 in the near term.
Richard Lee is a Currency Strategist at FXCM.
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