Bank of Japan (BoJ) Interest Rate Decision
The upcoming Bank of Japan interest rate decision, scheduled for next week, holds significant weight as market participants await clarity on the central bank’s policy direction. Consensus suggests that the BoJ is likely to maintain its ultra-loose monetary stance. However, with inflation hovering above the bank’s 2% target and mounting pressures for policy normalisation, some analysts anticipate a subtle shift in tone.
Recent commentary from BoJ Governor Kazuo Ueda has signalled that while drastic moves such as immediate rate hikes are unlikely, the bank could explore adjustments to its yield curve control (YCC) framework, especially as the global trend leans towards tightening. Market reaction will likely depend on whether the bank delivers any unexpected surprises, such as tweaking the cap on 10-year yields. A dovish outcome could push the yen lower, while any hawkish hint might fuel volatility across yen pairs.
Key US Economic Events Next Week
- Initial Jobless Claims (18 January): Labour market resilience has been a consistent theme in the US economy. A lower-than-expected print could support the US dollar, while a rise might dampen sentiment.
- Core PCE Price Index (19 January): The Federal Reserve’s preferred inflation measure will offer fresh clues on whether inflationary pressures persist. A strong reading may prompt speculation about further Fed tightening, benefiting the dollar.
- Retail Sales Data (19 January): Consumer spending insights are critical for gauging the overall health of the economy. Strong sales figures could buoy the greenback, while weaker results might weigh on it.
These events collectively are poised to impact dollar strength, influencing risk sentiment and carry trade dynamics, including the CAD/JPY pair.
Technical Analysis: CAD/JPY
The Canadian dollar to Japanese yen (CAD/JPY) pair has been trending lower, reflecting yen strength amid the Bank of Japan’s potential policy recalibration. As of this writing, the pair is trading around 107.93, positioned below the key resistance of 109.00, with bearish momentum gaining traction.
Wave Analysis: The pair appears to be in the early stages of a larger Elliott Wave ((iii)), suggesting continued downside pressure. Following the corrective wave ((ii)) peak, the subsequent impulsive wave ((iii)) is anticipated to target lower levels, aligning with the Fibonacci extensions.
- Support Levels: Immediate support lies at 107.50, followed by 106.00, a key psychological level and potential wave iii target.
- Resistance Levels: Resistance is at 108.50 (near-term) and 109.00 (previous channel support turned resistance).
The bearish setup is reinforced by a breach of the ascending channel structure, coupled with weak RSI levels, indicating further downside potential.
CAD/JPY Fundamentals: Canada’s economic performance and crude oil prices remain vital for CAD. A decline in oil prices or subdued Canadian data could exacerbate CAD/JPY’s downward trajectory. Conversely, if the BoJ disappoints market expectations, a short-term recovery in the pair could be on the cards.
Conclusion
- BoJ’s Decision: Markets are leaning towards dovish expectations but remain alert for surprises.
- US Data: Core PCE and Retail Sales figures will be pivotal for the USD, indirectly affecting CAD/JPY.
- CAD/JPY Outlook: A continuation of bearish pressure is expected into wave ((iii)), with a medium-term target at 106.00. Risk events, including BoJ surprises or volatile oil prices, could influence this trajectory.
