Don't Buy The JPY; CAD Sell-Off Intact

In Asian hours the main focus was on inflation data in Japan. At 2.4% YoY (cons. 2.3%, prev. 2.4%) December CPI was released above expectations. This supported the JPY, mainly due to the notion that there is a falling probability of the BoJ turning more aggressive anew.

However, accounting for the sales tax hike in April 2014, core CPI grew by 0.5% YoY, which suggests that the BoJ remains far from escaping deflation sustainably. As such it can still not be excluded that the central bank will consider additional policy action by the end of the year.

Under such conditions the JPY should remain a sell on rallies, in particular against the USD, which should benefit from further rising Fed rate expectations.

The CAD has been steadily depreciating since the BoC decided to ease monetary policy further on 21 January. As weak commodity price developments and unstable growth prospects keep inflation subject to downside risk, the central bank is unlikely to turn less dovish anytime soon. Capped central bank rate expectations and unstable risk sentiment should keep the CAD under pressure in the short- to medium-term.

It must be noted too, that according to IMM data speculative short positioning has not yet reached extremes. This suggests there is only limited position squaring-related downside risk.

In terms of data, today’s focus turns to the November GDP release. However, given its backward looking nature, we expect only limited currency impact.

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