Currency investors should consider selling CAD/JPY this week, advises CitiFX in its weekly FX pick to clients.

CAD has been battered by news flow and the stream of negative developments is likely to extend in the week ahead. The main event risk is the BoC meeting, from which Citi expects a cut. Investors have rapidly moved to price in greater risk, with interest rate expectations falling about 10 bps over the past week. Money markets now discount about 15 bps of cuts, so there should be further downside. Retail sales and CPI this week likewise pose risks for CAD losses should they come out soft. The recent trend in Canadian data flow has been negative with Canadian data surprises the worst in the G10 and the Business Outlook survey last week showing the weakest intentions for hiring and spending since 2008 recession. Particularly as price expectations have also move deeply negative as they did in Q4 2014 just ahead of the last BoC cut, this supports the view that policymakers will take action.

Amid the risk-off environment, JPY remain an attractive vehicle for CAD shorts. JPY tends to appreciate as a safe haven currency while market sentiment remains weak, partly driven by hedging by overseas real money investors who have invested in Japanese share markets. Given the latest sharp declines in stocks, such flow looks likely to continue to support JPY moving forward. Limited expectation for additional BoJ easing in the wake of hawkish comments by BoJ Governor Kuroda last week removes a potential impediment for a stronger JPY,” Citi says as a rationale behind this call.

Trade: “Sell CADJPY at 80.61, target 78.40, stop 81.90,” Citi advises.

This article originally appeared at eFXnews.

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