CAD/JPY weakens for third consecutive day after BoC rate cut

• CAD/JPY weakens as BoC cuts interest rates for third consecutive meeting.
• The Yen gains support from rising real wages in Japan, which bolsters growth prospects.
• A drop in the price of WTI crude oil below $70.00 per barrel further weighs on the CAD/JPY.

CAD/JPY is trading a quarter of a percentage point lower at 106.10 on Thursday as the Canadian Dollar (CAD) weakens on a combination of falling oil prices – crude is the country’s largest export – and expectations that the Bank of Canada (BoC) will continue to cut 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.

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

At 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 far.” Adding, “If inflation continues to decline in line with our July forecast, it is reasonable to expect further rate cuts.”

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

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

Apart from that, Takata remained ambivalent, saying, “We (the BoJ) have no pre-set idea about the pace of rate hikes, nor whether we will raise rates multiple times,” adding, “We have no choice but to examine at each policy meeting how market movements affect corporate balance sheets, earnings and risks to the economy.”

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