CADJPY

The CAD/JPY has been printing bullish price action ever since the head and shoulders reversal pattern failed towards the end of March and bears were trapped.

As a result of the dovish policy statement, the Canadian dollar slumped.

The Bank of Canada is going to make a decision on whether to follow the US Federal Reserve and hike interest rates by 25 basis points when it concludes its meeting later on today.

Volatility has not been at these elevated levels for prolonged periods in a while. FX traders will be curious to find out whether the stock market sell-off will gather pace, as this could keep the safe-haven Japanese yen bid, potentially meaning bearish USD/JPY, especially in light of last week’s cautious assessment of the US economy by two Federal Reserve members.

One interesting yen pair to watch this week could actually be the CAD/JPY, due to the Bank of Canada’s rate decision tomorrow.

Although we had three central bank meetings in Europe today, the biggest move in the FX markets was triggered by a speech from the Bank of Canada’s Governor this afternoon which sent the Canadian dollar surging higher.

The new week started slowly this morning as government bond selling took a breather. Consequently, stocks bounced back at the open which resulted in further weakness for perceived safe-haven gold and silver.

The Canadian dollar has outperformed in recent weeks. That’s despite ongoing weakness in crude oil, which is Canada’s main export commodity. So, what’s driving the CAD higher? Expectation about tighter monetary conditions in Canada, after the Bank of Canada delivered a strong hint a couple of week about raising interest rates. Those expectations could be revised however in the event crude oil falls furthers and stays weak, or if incoming data deteriorates once again.

Crude oil prices surged higher in response to comments made by Russian President Vladimir Putin about a Russian-OPEC production cut. Brent oil reached a new 52-week high around $53.70 per barrel while WTI came to within a few cents of the $51.65 level it had hit in June.

It has been an eventful day for the Canadian dollar. As my colleague Matt Weller reported earlier, the Bank of Canada opted to leave interest rates unchanged at 0.50% as been widely expected. The BOC also refrained from jawboning the currency lower and struck a neutral tone at its policy statement. This boosted the Canadian dollar, which has already been adjusting to rebounding oil prices. Speaking of which, crude oil rallied today on the back of the latest oil inventories data from the US Department of Energy. After last week's surprisingly large 10.4 million barrel build, the market was looking for a more moderate increase of about 3.0 to 4.5 million barrels this time. As it turned out, the DOE reported a build of 3.9 million barrels. As this was within the expected range, oil prices staged a relief rally. The data also showed a sharp decline in stocks of gasoline (4.5 million barrels) and distillates (1.1 million barrels). But Cushing stocks rose (by 690K barrels) and US oil output increased modestly. Overall, it was a mixed-bag report. But if oil manages to hold on to its gains now then this would be bullish for both oil prices and the Canadian dollar for the next several days. But as there has been no progress with regards to the OPEC and Russia oil-freeze deal, the potential gains for crude may be limited.