The Canadian dollar has broken above the crucial 115 yen on Tuesday, as oil continues to show signs of strength. The long-term correlation seems to be in effect at this point.
CAD/JPY
The Canadian dollar has broken above the crucial 115 yen level as we continue to see the oil trade play out. Oil rises, generally speaking, the Canadian dollar will follow right along against many currencies. The Japanese yen is a particularly interesting market for me to trade when oil is moving because Japan imports 100% of its petroleum, while Canada, of course, is a major exporter.
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The market had recently tested the 200-day EMA about 2 weeks ago, and now we are bouncing from there to show signs of perhaps trying to get to the 116 yen level. The noise in the Middle East, of course, continues to put upward pressure on oil, and I think that is part of what's going on here as well.
Bank of Japan Policy Constraints and Long-Term Targets
However, there is also the secondary part of the equation, and what I mean by that is the Bank of Japan. The Bank of Japan has a major problem because inflation is cooling off, and the debt load in Japan is such that it must keep interest rates lower than those of many other developed countries or watch the economy go into a negative spiral. So, they either can service their debt through inflating it away and keeping the yen weak, or they can have a strong currency and wipe out the economy.
Unfortunately for Japan, the longer-term trend has been to the upside, and it now looks like that is going to continue. The 117.50 yen level above is a major point of inflection, that's where the Bank of Japan intervened last time, and could be a bit of a target.
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