How economic policies, commodity prices, and geopolitics impact CAD/JPY

CAD/JPY is a currency pair with the Canadian dollar as the base currency and the Japanese yen as the quote currency. The exchange rate measures the value of CAD against JPY, or how many Japanese yen you need to buy one Canadian dollar.

Both JPY and CAD are major currencies, and the yen is the third most traded currency in the forex market after the US dollar (USD) and euro (EUR). Generally, CAD trades at a lower price than the US dollar, so this means that CAD/JPY is generally priced lower than USD/JPY. In times of market uncertainty, traders often use the CAD/JPY pair as an alternative to USD/JPY.

More about the CAD/JPY currency pair

Canada is a major oil exporter, so the Canadian dollar (CAD) is a commodity currency heavily influenced by the price of oil. As Japan is a heavy energy commodities importer there is a correlation between oil prices and the CAD/JPY exchange rate.

Increasing oil prices tend to boost Canada’s economy, so this makes CAD more attractive to investors. This often leads to CAD appreciating against JPY. On the other hand, persistent oil price declines can weaken the Canadian economy, leading to CAD potentially depreciating against JPY.

While CAD is a commodity currency, JPY is often considered a safe-haven currency, offering a stable investment during economic uncertainty. In times of market volatility, investors look for safe-haven assets and expect their value to remain stable or even appreciate. The Japanese yen is considered a safe-haven currency because Japan has a stable economy, low inflation and strong government policies.

What factors influence the CAD/JPY exchange rate?

There are several economic, monetary, and political factors that can impact the CAD/JPY exchange rate in forex market. Let’s look at some of these:

Economic indicators

• Interest rate differentials between the Bank of Canada (BoC) and the Bank of Japan (BoJ). Higher rates in Canada can attract foreign investors looking for better returns on their investments.

• Japan’s GDP growth rates: Astronger Japanese economy can boost JPY, which can cause CAD to depreciate if Canada’s economy does not grow at the same pace.

• Inflation levels: Rising inflation can devalue a currency, especially if central banks cut interest rates.

• Employment data: Higher employment levels indicate a stable economy.

Monetary policy

The Bank of Japan (BoJ) and the Bank of Canada (BoC) make decisions that influence interest rates, inflation, and overall economic stability, thus monetary policy has a big impact on the CAD/JPY exchange rate.

For instance, the Bank of Canada tightened its monetary policy stance in 2022 and 2023 in response to their economic recovery. This included increasing policy rates to control inflation and maintain financial stability.  

Political climate

Government economic policies can have a big impact on the value of a currency. For example, the Canadian government’s focus on careful spending and investment in key sectors contributed to economic growth in 2022 and 2023.

In addition, Canada is a major exporter of commodities like oil, metals and agricultural products. Changes in commodity prices can have an effect on the performance of the CAD due to their significant contribution to the country’s export earnings and overall economic health.

In the same way, the Japanese government has put in place a number of economic policies to promote growth and encourage innovation. The aim of these policies is to revive the economy and create a positive business environment for investors.

However, Japan’s aging population and falling birth rate also present economic challenges. The changing demographics may have an impact on consumer behaviour, labour markets, and overall economic growth, which could affect the performance of the JPY.

Geopolitical tensions

Geopolitical tensions can affect international trade and economic relations, which can lead to uncertainty and

increased volatility in the market.

Japan is widely recognised as a safe-haven currency, so the Japanese yen often sees an increase in demand during times of geopolitical uncertainty.

Commodity prices

Canada is a major exporter of raw materials like crude oil, natural gas, gold, and wood, therefore commodity prices can affect the CAD/JPY exchange rate. For this reason, the Canadian dollar is often referred to as a commodity currency. On the other hand, Japan relies on imports for many of its resources, especially energy.

Market sentiment

Overall market sentiment influences CAD/JPY. Japan is known for its economic stability and for maintaining a large current account surplus. Since the late 1990s, Japan’s banks have been operating in an extremely low interest rate environment, with the goal of stimulating economic growth.

How to trade the CAD/JPY pair

Choose a trading strategy

The 3 most popular trading strategies are day trading, swing trading, and position trading. Swing trading has a longer timeframe, with trades open from a few days to a few weeks, whereas day trading is an intra-day trading strategy with positions held from a few minutes to few hours. For traders who want to hold trades open for a longer time, position trading is also an option.

Determine whether to buy or sell CAD/JPY using CFDs

Trading CAD/JPY using CFDs allows traders to speculate on changes in the exchange rate without owning the underlying currencies.

Whether you buy or sell the CAD/JPY currency pair depends on the future direction of the exchange rate. You have the option to “go long” (buy the pair), or “go short” (sell the pair). If you think the Canadian dollar will strengthen relative to the Japanese yen, you might want to consider a long position. However, if you think that the Canadian dollar will weaken against the yen, you can consider a short position.

Plan your trading

You should implement your plan when you’ve chosen your trading strategy and decided whether to go long or short based on the market.

Developing a trading plan is an important part of successful trading as it will guide your decision-making and help you stay focused throughout your trading. A trading plan guides you in determining what, when and how much to trade.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.