Canadian dollar and Japanese yen (CAD/JPY) is not the most famous pair. It is characterized by low volatility and has a significant amount of liquidity provided by technical traders.
Japan’s economy, which reached $4.87 trillion in 2019, is three times larger than Canada’s $1.65 trillion economies over the same period, even though its territory is much smaller. Both countries are among the five largest partners in import-export.
Although both economies are highly developed and rich, they are completely different. Canada is focused on the export of goods, while Japan is focused on high technology and is forced to import a lot of its raw materials, including from Canada.
Japan’s reputation for financial stability means that it has become one of the largest safe-haven currencies in the world, and Canada’s attention to commodities and relatively higher interest rates makes this currency the target of speculative transactions.
Monetary policy about the Canadian dollar is established by the Bank of Canada (BOC), which has a sole mandate to maintain inflation at 2%, and the midpoint within the range of 1% to 3%.
The monetary policy for the yen is determined by the Bank of Japan (BOJ), which has an official inflation target of 2% per annum. However, this goal has not been achieved for a long time, as the bank supports one of the longest quantitative easing programs in history.
Both the BOC and the Bank of Japan meet every six weeks to make decisions on monetary policy. This is the most opportune moment for trading and getting margins based on technical indicators.
How to trade
CAD/JPY corresponds to the classic speculative currency pair and behaves accordingly. Often this is seen as a replacement for AUD/JPY or USD/JPY.
Canada’s dependence on commodities causes fluctuations in the exchange rates of a relatively more stable yen. As the global economy improves, commodity prices soar in dollars.
This reflects a search for profitability, as investors seek higher interest rates for dollars during periods of economic growth but fall back to the yen in times of economic uncertainty.
This pair behaves more in accordance with long-term bases, such as the economic growth of the respective countries, interest rates, and commodity prices.
It should also be noted that the United States is the main trading partner of Canada and Japan, so news from the largest economy in the world can also affect the pair, albeit to a lesser extent.
This pair is often used instead of USD/JPY, when traders are wary of the dollar and want to trade the yen. The main export of Canada is oil; therefore, oil prices also influence the pair.
The reason this pair is heavily influenced by oil is that Canada is a major exporter of oil and Japan is a major importer of oil.
Canada is the fifth-largest producer of crude oil in the world and has proven reserves that are second only to Saudi Arabia and Venezuela. Most of Canada’s oil is in oil sands.
Canada’s oil industry employs more than half a million people, with government payments of $18 billion. As you can see, crude oil makes up a very large percentage of the Canadian economy. Since Canada is a net exporter of oil when prices rise, it also helps to add value to the Canadian dollar.
Japan’s domestic resources, on the other hand, provide only 10% of its energy needs. About 47% of all energy needs are met by oil. Therefore, when the price of oil falls, it is better for the Japanese economy and usually strengthens the Japanese yen.