CAD/JPY weakens for third straight day after BoC cuts interest rates, weakness in Oil

CAD/JPY trades a quarter of a percent lower in the 106.10s on Thursday, as the Canadian Dollar (CAD) weakens from a combination of falling Oil prices – crude is the country’s largest export – and expectations the Bank of Canada (BoC) will continue cutting interest rates after a 0.25% reduction at its September meeting. Lower interest rates are negative for a currency as they reduce foreign capital inflows.

The CAD/JPY sees its third straight day of losses after declining sharply on Wednesday following the BoC’s decision to cut interest rates by 0.25% for the third meeting in a row, amid falling inflation and growth concerns. 

In his press conference after the meeting, Governor Tiff Macklem struck a dovish tone, saying “We need to increasingly guard against the risk that the economy is too weak and inflation falls too much.” Adding, “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further rate cuts.”

CAD/JPY saw further downside after data out of Japan showed a rise in real wages, which increased for the second straight month in July and reinforced expectations that the Bank of Japan (BoJ) will raise interest rates again before the year ends. Inflation-adjusted real wages in Japan rose 0.4% year-over-year in July as total cash earnings increased 3.6%. 

BoJ Board Member Hajime Takata struck a moderate, data-dependent tone in a speech on Thursday morning, however, that will have tempered downside for CAD/JPY. Takata said that “based on our hearings we expect more rate hikes in October,” but qualified this by adding, “though that was when the Yen was weakening.” 

Apart from that Takata remained ambivalent saying, “We (the BoJ) Don't have a preset idea on pace of rate hikes, or on whether we will hike rates several times,” and adding, “We have no choice but to scrutinize at each policy meeting how market moves affect corporate balance sheets, earnings and risks to economy.”

CAD/JPY lost further ground after WTI crude Oil fell below the $70.00 level amid rumors of OPEC+ production increases and the slowdown in China. Lower Oil prices are negative for CAD as its a major crude exporter but positive for Japan which is a major Oil importer.