JPMorgan backs loonie versus yen amid Central Bank triple crown

A trio of central bank policy decisions in the days ahead has JPMorgan Chase & Co. bracing for Canadian dollar gains versus the yen.

Consensus expectations are for the Federal Reserve to cut rates this week, and for the Bank of Canada and Bank of Japan to hold steady. JPMorgan economist Hiroshi Ugai, however, said in an Oct. 28 report that “economic conditions strongly support our view of the BoJ’s cut in the short-term interest rate,” though the probability of delaying easing is rising.

Positioning for loonie gains versus the yen offers the best way to capitalize on the potential divergence as well as forces such as a more optimistic global climate, according to a separate note from JPMorgan currency analysts.

“Action by the Fed and inaction by the BOC is well priced,” analysts including Paul Meggyesi and Juan Duran-Vara wrote in the Oct. 25 report. “Little is priced for the BOJ, which makes this a decent risk/reward opportunity, as does the more optimistic global backdrop and evident ongoing appetite of Japanese investors for foreign assets.”

The Canadian dollar has gained about 1.9 per cent against the yen in October, with the pair currently trading at 83.20 yen per loonie, after slipping from the highest since April. The loonie was the day’s laggard among major currencies after a three-week rally. JPMorgan initiated the recommendation at 83.10, with a stop at 81.47.

While the majority of economists expect the BOJ to stand pat Thursday, leaving its policy rate at minus 0.1 per cent, an increasing number anticipate a reduction in the near-term.

Options traders and hedge funds are also piling into long loonie bets. Speculators are the most bullish on the currency since February 2018, while three-month dollar-loonie risk reversals are the most in favor of Canadian dollar gains versus the greenback since 2009.

Should the BOC hold steady and the Fed cut rates as expected, the loonie is poised to displace the greenback as the highest-yielding Group-of-10 currency. Both central banks release decisions Wednesday.

Against a backdrop of improving U.S.-Mexico-Canada Trade Agreement ratification odds, the Canadian dollar should continue to grind higher, according to JPMorgan.

“CAD’s high-yield status should support seeping outperformance from the currency, especially with slightly better chances now of USMCA ratification in coming months,” the analysts wrote.

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— With assistance from Robert Fullem and Vivien Lou Chen.