CAD/JPY – How to Trade the Canadian Dollar Trade vs the Japanese Yen

Although a less-known pair compared to the majors, CAD/JPY can give you an advantage in the forex market. The pair provides a substantial amount of liquidity and it’s often seen as an ideal substitute for USD/JPY and AUD/JPY.

To trade CAD/JPY:

  • Study how trading CAD/JPY works.
  • Search for a forex broker and open an account.
  • Choose a trading platform.
  • Analyze CAD/JPY and formulate a plan for trading the pair. The plan should include a trading strategy.
  • Enter into a trade.

Although some traders consider CAD/JPY quite difficult to trade, the pair’s strong trends and volatility can increase the potential to make significant profits. But before you can capitalize on the trading opportunities, you need to understand how this pair works.

Currency Pair Chart and Profile

CAD/JPY is a pairing which expresses the value of the Canadian dollar in terms of the Japanese yen. The CAD/JPY pair is also known as Loonie Yen.


The economies behind CAD/JPY

Canada ranks 10th in GDP rankings. The Canadian economy depends heavily on commodity exports. The country is a big producer of oil, as well as minerals, grains, and wood products. Similar to all the major currencies in the world, the Canadian dollar is supported by a central bank, the Bank of Canada (BoC).

Japan has a GDP ranking of 3. The largest part of Japan’s economy comprises the service sector, but other major industries include automotive, textiles, electronic equipment, chemicals, machine tools, and processed food. 

Japan is popular for its financial stability due to a high trade surplus, low debt, and super-low interest rates. As such, the Japanese yen is typically perceived as a safe haven currency. Japan’s monetary policy is managed by the Bank of Japan (BoJ).

What influences the movement of CAD/JPY?

All currency pairs are influenced by a variety of factors. Some of the factors that strongly influence the movement of CADJPY include:

Fundamental economic data

CAD/JPY can be influenced by major economic data coming in from Canada, Japan, and the two countries’ big trade partners. This data includes inflation, interest rates, employment numbers, and GDP.

Commodity price movements.

Canada is the fourth-largest oil exporter in the world while Japan’s top import is mineral fuel, most notably oil. As is usually the case with countries that rely on commodities, the performance of the commodity market will affect their economies. In the case of CADJPY, oil prices affect both the yen and the Canadian dollar and this can impact CAD/JPY prices. 

Is CAD/JPY an exotic pair?

CAD/JPY is a minor forex pair. Since minor currency pairs are also called cross currency pairs or crosses, CAD/JPY is one of the yen crosses.

Pros of trading CAD/JPY

CAD/JPY is characterized by high volatility which provides opportunities to profit both in the short- and long-term. For example, the pair’s volatility means you can potentially make short-term profits from the swings in a choppy market. CAD/JPY also has a substantial amount of liquidity.

Besides the volatility and liquidity, CAD/JPY provides opportunities to possibly make good profits, especially when pursuing medium- and long-term strategies. Although both the Canadian dollar and Japanese yen are highly dependent on the commodity market and fundamental data, they are moved by different types of data. This is due to the differences in Canada and Japan’s socio-economic and political landscapes. This tends to result in the formation of strong, long-lasting trends.

Cons of trading CAD/JPY

The volatility of CAD/JPY offers traders the opportunity to make high-income trades, but it also increases the risk of trading the pair. Without good money and risk management rules, trading this volatile pair can lead to substantial losses. Additionally, CAD/JPY is more sensitive to market-wide sentiment changes than USD/JPY. This is because of the Canadian dollar’s historically higher yield. 

The Best Time to Trade CAD/JPY

CAD/JPY is most active during the American and Asian sessions. These are sessions that correspond to when CAD and JPY see the most trading volume and movement. The pair is least active during the European session, but the market can still see some movement as any significant data comes in.

Best Trading Strategies for CAD/JPY

Scalping

Scalping involves holding positions for as little as a few seconds to a few minutes in an attempt to make small profits of a few pips at a time. When scalping, it’s essential to identify the general direction of the market because the idea is to trade the trend.

Scalping may be a popular intraday trading strategy, but for a few pips to add up to substantial profit, you will need to trade high volumes. This can be very risky if you trade without robust risk management rules. Also, scalping requires constant market analysis and the placement of multiple orders, so it is more suited to traders who have the time availability.

Trend trading

Since CAD/JPY tends to form strong trends, it’s perhaps unsurprising that trend trading is one of the top strategies for trading the pair. The assumption with trend trading is that the market will move in a particular direction for a certain period.

Trends can move up, down, or even sideways. A key element of trend trading is identifying the type of trend that is occurring. For instance, a downtrend shows a series of lower highs and lower lows, while an uptrend shows higher highs and higher lows.

You can determine when to enter the market using trend trading tools such as the trendline. For example, you could go long when the price pulls back to, and bounces higher off a rising trend. In a falling trend, you could go short when the price rises to, then falls away from the trend. 

In addition to the trendline, you can also identify the trend direction using other tools such as moving averages and technical indicators.

Carry trading

A currency carry trade typically entails borrowing a currency with a low-interest rate and using it to buy a high-interest-rate currency. The general notion behind the strategy is to capture the difference between the rates. Depending on the amount of leverage used, the gains from the interest rate differentials can be substantial.

Historically, the Canadian dollar has been one of the major currencies with the highest interest rates. On the flip side, Japan usually has near-zero interest rates and it has, in the past, made a good funding currency for carry trades. As such, both CAD and JPY have made CAD/JPY an ideal carry trade vehicle in most cases.

Correlated Instruments or Currency Pairs

CAD/JPY is strongly correlated to USD/JPY and AUD/JPY, hence it’s often used as a proxy for these pairs.

Both the Canadian dollar and the Japanese have close ties to the U.S. economy. The ties are especially unique between Canada and its neighbor, the U.S. The U.S. is Canada’s biggest trade partner and to a large extent, economic conditions in the U.S tend to spill into Canada’s economy. 

CAD/JPY is often used as a substitute for USD/JPY when traders are wary of trading the U.S. dollar but still want to trade the yen.

Similarly, CAD/JPY is often used to substitute AUD/JPY. The Canadian dollar and Japanese are linked closely to the Australian dollar. Japan is one of Australia’s trade partners and Canada’s economy is commodity-based, just like Australia’s.

Because Canada’s economy is closely linked to the U.S. economy, which in turn, is linked to the Euro, CAD/JPY has a significant correlation with EUR/JPY.

Correlation of CAD/JPY with other commodities

Crude oil prices have a strong influence on the movement of CAD/JPY. Canada is a major oil exporter, while Japan is among the largest oil importers in the world. When oil prices drop, CAD/JPY usually drops as well, and vice versa.

Related Questions

What causes volatility in the Japanese yen?

Although the yen is one of the most traded currency pairs, trading it has always been viewed as notoriously hard. One of the reasons why some traders hold this view is because of the currency’s volatility which is caused by numerous factors. Some of the top drivers of this volatility include:

  • The monthly Bank of Japan announcements. Unlike with other central banks, announcements by the BoJ are not given at a designated time. This lack of a set schedule for announcements can cause turbulence in short-term yen movements, throwing the market into a chaotic state.
  • Economic indicators such as GDP, CPI, and industrial production can cause dramatic fluctuations in the yen after they are released to the public.
  • Since JPY has long been a funding currency for CAD/JPY carry trades, any speculation of higher interest rates in Japan can cause big fluctuations throughout the forex market. This will likely make the yen volatile as well.
  • The yen can be extremely sensitive to commodity prices due to Japan’s substantial oil imports.

Is the Canadian dollar strong?

The strength of a currency is usually determined by the currency’s relative purchasing power against another currency. While the Canadian dollar is largely seen as a strong currency, its strength will depend on what you compare it to. For example, when compared to gold, the Canadian dollar maintains its value just like other major currencies, but when it comes to the U.S. dollar it’s weaker.

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