CAD/JPY breaks out of bull flag ahead of BOC

The Bank of Canada will take centre stage today, which will bring the Canadian dollar into sharp focus.

There’s been some talk of a surprise 75 basis point hike at this meeting, although I highly doubt this will be the case as the BOC wouldn’t want to exchange rate to appreciate even more sharply. What’s more, BOC speakers have not explicitly supported the idea of a larger hike. Along with consensus, I too expect the North American central bank to lift rates by 50bps to 1.5%. It is likely we will see further hikes in the months ahead as the bank tries to bring down inflation back towards the 2% target. It will be a tough ask given that CPI is at 6.8% in Canada and also elevated globally.

Whether or not the Canadian dollar will be able to extend its recent advance will depend on the language the BOC will use as a 50bps hike is fully priced in, you would expect. If the statement clearly indicates rates will need to keep rising, which I think will be the case because there’s excess demand in the economy and obviously inflation is persisting well above the target, then the CAD should remain supported on the dips. Specially, if the BOC suggests it will keep the pace of hiking at 50bp in July, then that should keep CAD investors happy.

Ahead of the Bank of Canada’s policy decision today, the CAD/JPY has risen for the sixth consecutive sessions.

From a technical point of view, the CAD/JPY remains in a strong bull trend, and it looks like the currency pair has ended a month-long consolidation pattern after breaking out of the bull flag pattern:

The bull flag is a continuation pattern and when prices break out from it, there tends to be a strong move in the prevailing trend. So, in this case, we may well see a strong break above April’s peak at 102.95, possibly as early as later today. The next psychological round handle of 105.00, which is just over 200 pips away from that high, may well be the next target for this pair.

Key support now comes in at around 101.00. Below this, the 100.00 handle is the next big level that must be defended for the bulls in order to keep the momentum alive.

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