Canadian dollar to rise on better than expected GDP growth

The wildfire in the Alberta region of Canada and the subsequent news of its negative impact on the export revenues kept the Canadian dollar weak for the most of August.

Similarly, the uncertainty in the US Fed rate hike and the mixed economic data kept the Greenback weaker. This indirectly propelled the Japanese Yen, a safe haven currency.

However, some startling revelations made by the CIBC markets make us believe that the exchange rate of the CAD/JPY pair is poised to move into the 80 levels soon.

We hereby present the arguments that form the basis of our bullish view on the CAD/JPY pair.

CNBC

Traders who are not active in the commodity market use the news or economic data related to crude oil for taking a long or short position in the Canadian dollar. The reason is that for more than a decade, the Loonie had a direct correlation of 78% with the crude oil. However, it no longer seems to be the case as per CIBC markets.

When the crude oil appreciated by about $10 last month, based on the correlation, the market was expecting the Canadian dollar to rise by at least 2.5%. While Norwegian Krone, which is also an oil price dependant currency, rallied as per the forecast, the Canadian dollar did not. The analysts believe that the Canadian dollar will exhibit considerable movement only if the crude moves out of the $40 to $50 range.

Thus, current price of about $45 per barrel will have little negative impact on the Canadian dollar. On the other hand, Statistics Canada announced that the economy expanded by 0.6% in June. The GDP growth was higher than the analysts’ expectation of 0.4% growth. Furthermore, the economic expansion wiped off the 0.6% decline in May.

The US Fed Chair Janet Yellen hinted that a rate hike is possible in the weeks ahead as the US economy has shown firm signs of recovery. Any doubt regarding the rate hike was put to rest by the comments made by Fed Vice Chairman Stanley Fischer. In response to a query from CNBC, Fischer stated that there exists a high probability of a rate hike next month and again at the end of the year. Based on this message, we believe that the speculators would be concentrating on building long positions in the US dollar. This would indirectly weaken the Japanese Yen. So, considering the overall scenario, we anticipate the CAD/JPY to remain in an uptrend in the days to come.

The chart indicates consolidation of the CAD/JPY pair at78 levels. The stochastic indicator is moving out of the bearish zone. This reflects the possibility of an uptrend in the CAD/JPY pair. The next resistance for the cross exists at 81.60.

So, a Forex trader should think of taking a long position in the CAD/JPY currency pair near 78.80. To protect the account from unexpected volatility, a stop loss order can be placed below 77.40. The profit for the long position can be booked at 81.

A trader can contemplate on the purchase of a one touch call option contract from a suitable binary broker. The target level for the call option should be about 81. As far as the contract expiry is concerned, the trader should select a date in the last week of September.