CAD/JPY likely to test 96.40 on BOC status-quo

CAD/JPY erased previous gains and slid during the European session, largely as the Canadian dollar was sold-off across the board on a bout of profit booking after the recent strength in CAD on upbeat GDP data. The cross was also weighed by mild strength in the Japanese currency against the greenback on increased safe-haven bids. CAD/JPY currently trades at 95.60 levels, -0.22% lower on the day, bouncing-off crucial support at 95.40 levels.

The pair is recovering losses and could rise to 96.40 levels on BOC rate decision as

1. Recent Canada’s macro data supportive of CAD:
The Canadian dollar remains underpinned on the back of recent better than estimates macro data including Canada’s CPI and GDP data. Canada’s CPI declined -0.2% m/m January, against -0.7% decrease in December, beating estimates of -0.4% drop. Moreover, Canada’s fourth quarter (Q4) growth surprised the markets on the upside, as it expanded 2.4%, beating estimates.

2. Bank of Canada (BOC) likely to keep rates on hold:
The BOC is likely to keep interest at 0.75% at its meeting later today, after January’s shocking move to lower the rate from 1%, where it had been since September 2010. Given the latest upbeat economic data and stabilizing crude prices in the past month, BOC may refrain from further easing and may adopt a wait and watch approach in order to to fully evaluate how the lower oil prices are impacting the nation’s economy. Moreover, BOC may also follow foot-steps of Reserve Bank of Australia’s (RBA) after the OZ central bank left rates unchanged in its policy meet earlier this week.

3. Steady crude oil prices:
Crude oil prices remains steady awaiting weekly crude stockpiles report later in the day. US Crude prices seem to have formed a support zone around USD 50 levels and continue to hold firmly above that level. Moreover, market participants have already priced-in record high inventory levels as it would be the eighth straight week of a new record high.

4. Gains in the yen capped by a stronger USD:
CAD/JPY is likely to be benefitted by a weaker yen mostly driven by strong gains in the USD/JPY pair. The US dollar rebounds sharply, sitting near fresh eleven year highs against its major counterparts ahead of US employment data due to be released later in the session. ADP Non-Farm Employment Change data is expected to come in at 219K in February versus the 213K in January. Moreover, higher 10-year treasury yield holding firmly above 2.1% on increased rate-hike bets after the latest solid US macro data may also further boost USD/JPY, dragging the yen lower.

Technically, CAD/JPY has bounced-off crucial support at 95.40 levels seen on the hourly chart on several occasions and currently trades well above that level. To the upside, the cross face immediate strong resistance at 50-DMA located at 95.75 levels. A break above that level, CAD/JPY climbs higher to test crucial resistance at 96.40 levels. On the flip side, a failure to breach the crucial resistance at 95.75, the pair may bounce-back lower to once again test 95.40 levels and below that doors would open for a retest of 95 levels and may slide further below to 94.60 levels.