CAD/JPY is a great proxy for global growth expectations and it's threatening an important level.
The pair spiked in late May and early June to 107.24 after an 11-day rally that looked like it could be a blow-off top. But after a retracement to 102 the pair steadied and now it's just a few pips away from the high in a fifth consecutive day of gains.
There's a big risk for the pair in the hours ahead with the Bank of Japan decision. Provided they leave policy and guidance unchanged, there's a window for a fresh breakout here.
Risks to global growth have certainly risen since June but the Bank of Canada hiked 100 basis points anyway last week to a DM-leading 2.50% last week. With Canadian 2-year notes at 3.30% that's a huge spread over Japanese twos at -0.07% and even 10s, which are capped at 0.25%.
There are also upside risks to energy prices, which would further add to Canada's trade surplus and would be a drag for Japanese trade.
More than anything, the short-term trade in this pair depends on overall market sentiment and the 2.6% rally in the S&P 500 today along with the breakout in crypto suggests that animal spirits are returning.
