The USD/JPY currency pair has experienced a significant increase of 200 pips today, marking its fourth consecutive day of gains. This surge is a result of the foreign exchange market adjusting to a stronger US dollar and a robust US economy. The movement in the pair is now in line with Treasury yields, which have rebounded from a decline that began in late July.
One possible factor contributing to this shift is a potential election trade on the US dollar, with investors speculating on the outcome of the upcoming US elections. There is also the looming possibility of a “red sweep” scenario, which could lead to large deficits and higher yields. This anticipation may have caused a short squeeze, as there were many traders holding short positions on the US dollar, expecting a decline in US exceptionalism.
Another noteworthy development is the yen crosses breaking out to their highest levels since early August, indicating a positive sentiment towards risk-taking, despite S&P 500 futures showing a slight decline of 0.2%.
However, the focal point for today is the Canadian dollar, as the Bank of Canada is set to announce its decision at 9:45 am ET. The market consensus is for a 50 basis points adjustment, but there is a possibility of a range from 25 to 75 bps. The future trajectory of the Canadian economy remains uncertain, diverging from the path of the US economy.
For the USD/CAD pair, it would require a notably dovish surprise from the Bank of Canada to push the currency pair above the highs seen in the past year. Much of the negative news surrounding the Canadian economy is already factored into the current pricing.
Overall, the foreign exchange market is experiencing significant movements and adjustments in response to various economic factors and policy decisions. Investors are closely monitoring developments in different economies to gauge the future direction of currency pairs and trading opportunities.
