- An increasing probability of stagflation risk in the US may see further narrowing of the 2-year sovereign yield premium spread between US Treasuries and JGBs.
- CAD/JPY is the second worst-performing major yen crosses in the past three months.
- CAD/JPY may see another round of impulsive down move sequence with the following medium-term supports coming in at 99.60 and 97.55.
This is a follow-up analysis of our prior report “CAD/JPY Technical: Trump’s shock and awe trade policy manoeuvre erased CAD gains” published on 21 January 2025.
Since the publication of our prior analysis, the price actions of CAD/JPY have declined by 6.6% to print a low of 101.38 on 11 March 2025, which hit the first medium-term support of 101.80 mentioned in our earlier report.
Thereafter, it recorded a bounce of 4.4% to print a recent high of 105.87 on 26 March ahead of US President Trump’s 2 April “Liberation Day” announcement of reciprocal trade tariffs. Canada has already been hit with 25% tariffs on certain goods.
Even though the Canadian industry has been left unscathed from the US reciprocal trade tariffs announced on 2 April, Canada will still be hit with the universal 25% automobile tariffs that is taking effect today, 3 April, with other sectorial/industrial tariffs such as lumber to be enacted by the US White House soon.
Several yen crosses have started to show weakness
Fig 1: 3-month rolling performance of G-10 JPY crosses with 2-year US Treasury/JGB yield spread as of 3 Apr 2025 (Source: TradingView)
Weakness in several major G-10 yen crosses has resurfaced for the past week, driven by a narrowing of the 2-year sovereign yield premium spread between US Treasuries and Japanese Government Bonds (JGBs), and rising systematic risk from US trade tariffs woes.
Based on a rolling three-month performance as of 3 April, the CAD/JPY is the second-worst performing (-4.9%) major yen cross pair, just hovering above the worst hit USD/JPY (-5.8%) at this time of the writing (see Fig 1).
Stagflation risk in the US may reinforce further yen strength
Fig 2: University of Michigan Consumer Sentiment Index with inflation expectations as of Mar 2025 (Source: TradingView)
The latest finalised University of Michigan Consumer Sentiment Index for March has plummeted to 57 from its prior month reading of 64.7. Consumer sentiment in the US declined for a third consecutive month to hit the lowest since November 2022.
In addition, in the same survey report, both the 1-year and 5-year inflation expectations soared significantly, with the 5-year forward-looking inflation gauge soaring to a 32-year high of 4.1% in March.
These recent observations suggest a rising risk of stagflation in the US economy due to uncertainties in growth prospects and the cost of living, which are exacerbated by the current US White House’s erratic and aggressive trade tariff policy.
An increasing probability of a stagflation environment may see a further narrowing of the 2-year sovereign yield premium spread between US Treasuries and JGBs as US economic growth and corporate earnings get revised downwards, in turn, benefiting the yen that takes up the role as a currency hedge (see Fig 2).
CAD/JPY’s bearish reaction below its 50-day moving average
Fig 3: CAD/JPY major & medium-term trends as of 3 Apr 2025 (Source: TradingView)
The recent corrective rebound of the CAD/JPY from its 11 March low may have reached its terminal point on 26 March as price actions of the CAD/JPY have shaped a bearish reaction candlestick after a retest on its downward sloping 50-day moving average, and the former long-term secular ascending channel from the March 2020 low now turns into a pull-back resistance after price actions breached below it on 21 February 2025 (see Fig 3).
In addition, the daily RSI momentum indicator has flashed out a bearish momentum condition which supports the start of a potential impulsive down move sequence.
Watch the 108.30 key medium-term pivotal resistance (also the 200-day moving average), and a break below 101.80 exposes the next medium-term supports at 99.60 and 97.55.
On the other hand, a clearance above 108.30 invalidates the bearish scenario for the next medium-term resistances to come in at 111.45 and 115.90 next.
