USD/CAD, CAD/JPY forecast: Canadian dollar analysis - July 24, 2024

The Bank of Canada’s decision to cut interest rates by 25 basis points was already expected, and so the USD/CAD or CAD/JPY didn’t move materially when the expected news hit the wires, even if the central bank appeared to be somewhat more dovish than expected. The CAD/JPY forecast has turned negative following this week’s big rally in the yen, while the USD/CAD forecast will be in focus with the release of key US data in the coming days.

Bank of Canada cuts rates as expected

The Bank of Canada trimmed rates to 4.5% from 4.75% in an expected move and indicated that further rate cuts are on the table if inflation eases as expected. Looking ahead, the BOC reckons that economic growth is likely to pick up in the latter half of 2024 and continue through 2025, driven by stronger exports, a rebound in household spending, and robust residential investment. On the inflation front, the BOC thinks core inflation will slow to about 2.5% in the second half of 2024 and decrease further in 2025, while headline CPI inflation is expected to stabilise around the 2% target next year, although the path to this goal may not be smooth.

CAD/JPY forecast: Yen roars higher

While the Canadian dollar has faced headwinds, the Japanese yen has been making a strong comeback. This rise in the yen reflects a narrowing bond yield spread between Japan and other countries, which had widened significantly due to Japan's prolonged expansionary monetary policy compared to the more contractionary measures taken globally to address rising inflation. As many central banks begin or prepare to implement rate cuts, Japan has only recently started to tighten its monetary policy. Consequently, Japanese yields are gradually increasing, while global yields are decreasing. Attention is now focused on the upcoming Bank of Japan meeting, with speculation growing that the central bank might raise interest rates by ten basis points. There is also a potential risk of further intervention by the Japanese government, though the yen's recent recovery has reduced the urgency for such measures. Anyway, the CAD/JPY forecast is now tilted more on the bearish side and we could see any recovery attempts falter as the BoJ slowly normalises its policy.

CAD/JPY forecast: technical analysis

The CAD/JPY broken further lower after taking out support around the key 113.00 area this week, falling slightly below the 111.00 handle at its lowest point, where it was trying to form at least a temporary low at the time of writing.

While a short-covering bounce from these short-term oversold levels should not come as surprise, with several support levels already broken in recent days, the technical path of least resistance is now to the downside.

As such, we could see any recovery attempts later this week fade near broken support levels like 113.00 or 113.60.

At the time of writing, the CAD/JPY was probing liquidity below the 200-day average circa 111.50. A close below it in the coming days could potentially pave the way for a run towards 110.00 next.

USD/CAD forecast: All eyes on US GDP and core PCE

The USD/CAD will become more active as we head to the business end of the week when key US data are expected to move the dollar sharply in the direction of the surprise. Let’s see whether the USD/CAD will be able to break out of its recent consolidation zone and take out key resistance at around 1.3800 or fall back down towards 1.3700 support…

Advance US GDP expected at 2%

All eyes will be on Thursday’s advance estimate for the second-quarter US GDP growth and the June core personal consumption expenditure (PCE) deflator. The first quarter saw modest growth at 1.4%, with consumer spending at 1.5%. This time, analysts are optimistic, predicting a 2% growth rate fuelled by better consumer spending, rising inventories, and stronger investments. Despite this, challenges loom, and many expect slower growth in the latter half of 2024, potentially prompting the Federal Reserve to consider further rate cuts beyond the expected cut in September.

Core PCE index seen rising 0.2% in June

Recent hints from Federal Reserve officials, coupled with a cooling job market and declining CPI, indicate that the central bank is ready for a rate cut in September. While the Fed hasn't officially declared victory over inflation, they're close. The core PCE price index, their preferred measure of inflation, could cement their confidence on Friday. However, if the data falls short, uncertainty will continue to cloud the economic outlook.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R