CAD/JPY Trading Guide: How to Trade the CAD/JPY FX Pair

Forex traders look at the CAD/JPY (CADJPY) pair to get exposure to the price movements in the relative value of the Canadian and Japanese economies. Factors like oil prices, interest rates, and market sentiment, among others, can all influence the CAD/JPY exchange rate.

Let’s take a closer look at what you need to know about the CAD/JPY Forex pair before trading it, what factors influence its value and how to trade the CAD/JPY:

TL;DR

• The CAD/JPY tells you how much Japanese Yen (JPY) you need to buy one Canadian Dollar (CAD).
• The JPY is often considered a safe-haven currency.
• In April 2022, the Japanese Yen (JPY) was a major player in the foreign exchange market, accounting for 17% of all Forex trades. Meanwhile, the Canadian Dollar (CAD) held a smaller share, representing 6.2% of all FX positions.
• There are several ways to trade the CAD/JPY currency pair*.
• You can buy and sell CAD/JPY directly on the spot market. You can invest in currency Exchanged-Traded Funds (ETF). You can also trade CAD/JPY futures and options contracts.
• You can also trade Contracts for Difference (CFDs) on the CAD/JPY, which allows you to speculate on rising and falling price movements of this popular currency pair without actually owning the currencies.

*Availability subject to regulation.

What Is the CAD/JPY Currency Pair?

The CAD/JPY currency pair represents the exchange rate between the Canadian Dollar (CAD) and the Japanese Yen (JPY). As of April 2022, the JPY is the 3rd most traded currency in the world, while the CAD is the 7th.

Because some countries have their economies heavily relying on commodities’ exports, such as Oil (CL), Natural Gas (NG), Gold (XAU), or Wheat (ZW), their currencies are called commodity currencies and their value tends to move in tandem with the prices of commodities.

As Canada is a major oil exporter, the Canadian Dollar (CAD) is a commodity currency heavily influenced by the price of oil. And because Japan, on the other hand, is a heavy energy commodities importer, there is a correlation between oil prices and the CAD/JPY exchange rate.

Rising oil prices tend to strengthen the Canadian economy, making the Canadian Dollar more attractive to investors. This can lead to an appreciation of CAD against the Japanese Yen. Conversely, sustained oil price declines can weaken the Canadian economy, potentially leading to a depreciation of CAD against JPY.

While the CAD is a commodity currency, the Japanese Yen is often considered a safe haven currency, which can be seen as a shield during economic storms. Investors flock to safe havens when things get shaky, expecting their value to hold or even rise in times of market turbulence. The Yen is a safe haven currency because it boasts a stable economy with low inflation and a reliable government.

Overall, this can create interesting dynamics in the CAD/JPY, potentially causing a positive relationship between oil prices and the exchange rate and an inverse relationship between global economic sentiment and the pair.

What Drives the Value of the CAD/JPY FX Pair?

Before you start trading the CAD/JPY currency pair, you should be aware of the most important factors that can influence Forex pair, as it can help you be more aware of what can drive the price of the CAD/JPY up or down:

Economic Trends & Conditions

The phase of the current economic cycle, macroeconomic trends, and the overall economic climate tend to influence the value of a given country’s currency. In the case of the CAD/JPY trading, some economic data pieces can be closely followed to get a better idea of Canada and Japan’s economic health and growth prospects.

Gross Domestic Product (GDP), Personal Consumption Expenditures (PCE), Consumer Price Index (CPI), and Purchasing Managers' Index (PMI) are often some of the most popular economic releases, as well as interest rates decisions from the Bank of Japan (BoJ) and the Bank of Canada (BoC).

Monetary & Fiscal Policies

Canadian and Japanese monetary and fiscal policies can impact the CAD/JPY through interest rate differential and government spending.

Usually, higher interest rates attract investment, which tends to strengthen the related currency, while lower key rates frequently push the currency down. Government spending can also influence the exchange rate. Increased government spending can stimulate economic activity and potentially strengthen the currency, while reduced spendings can do the opposite.

Elections

Elections can influence a country's currency because voters are choosing between parties with different approaches to spending and economic and fiscal approaches.

Geopolitical Tensions

Depending on the nations involved and how these tensions can influence global trade and economic relations, uncertainty about the future and market volatility can increase, leading to more tensions.

Because the Japanese Yen is often seen as a safe-haven currency, international geopolitical tensions can lead to a potentially higher demand for the JPY.

Natural Disasters

Both countries can be influenced by natural disasters due to climate change and extreme weather events, such as earthquakes, tsunamis, cyclones, wildfires, floods and droughts.

Unexpected Events

Unexpected events like war strikes or epidemics can trigger market volatility and sharp movements in the CAD/JPY pair as traders seek safe havens or adjust their holdings based on potential economic disruptions.

Commodity Prices

Commodity prices can influence the CAD/JPY exchange rate, as Canada is a commodity exporter, especially oil, gas, farm, fishing and intermediate food products, and Japan is a commodity importer, especially energies.

Currency Carry Strategy

Japan's low interest rates make the Japanese Yen a popular choice for carry trade strategies, where traders borrow in low-interest currencies like JPY and invest in higher-yielding assets like the CAD.

Market Mood

Speculation and trading psychology can all intertwine to influence the CAD/JPY exchange rate, creating periods of volatility and potential trend reversals depending on the main emotion driving the markets, whether that be fear, overconfidence, optimism, greed or panic.

How to Trade the CAD/JPY Forex Pair

To get ready to trade the CAD/JPY currency pair, here are 4 steps to help you potentially maximise your trading experience:

Choose a Trading Strategy

Day trading, swing trading and position trading are among the 3 most popular trading strategies.

While day trading is an intra-day trading strategy with positions held between a few minutes to a few hours, swing trading has a longer timeframe with trades open between a few days to a few weeks. For those with a longer time horizon aiming at capturing more significant trends or rate differentials between two countries through currency carry trading, they can use position trading.

Depending on your knowledge, market experience, risk tolerance, and time horizon, there are various types of advanced or basic Forex trading strategies you can use, such as trading economic data, trend trading, range trading, breakout trading, and support and resistance trading, among others.

Determine Whether to Buy or Sell the CAD/JPY using CFDs

Trading CAD/JPY using CFDs allows traders to speculate on the fluctuation of the exchange rate between the Canadian Dollar against the Japanese Yen without owning the underlying currencies. The decision to buy or sell the CAD/JPY currency pair hinges on your take on the future direction of the exchange rate. Traders can either choose to “go long” on the CAD/JPY (buy the pair), or “go short” (short-sell the pair).

If you believe that the Canadian Dollar will strengthen relative to the Japanese Yen (upward trend), you should consider long positions. Conversely, if you think that the Canadian Dollar will weaken against the Japanese Yen (bearish trend), you might want to consider short positions.

So, how can you differentiate bullish from bearish markets?

Forex traders can use different market analysis approaches, mainly technical analysis and fundamental analysis. Some traders use these techniques independently, while others like to combine them.

Using technical analysis in trading to take advantage of CAD/JPY price fluctuations can imply the incorporation of technical indicators in your strategy like the Relative Strength Index (RSI), the Slow Stochastic Indicator, the Coppock Curve Indicator, and Fibonacci extensions among others.

It is also possible to identify technical triggers with various types of trading charts and candlestick price patterns, like confirmation patterns or reversal patterns such as head-and-shoulder.

For those who do not have enough experience to master technical analysis, or for traders looking at longer trades because of the challenges of short-term trading, they can turn to fundamental analysis.

This type of market analysis ​​usually involves following the economic calendar to be aware of major economic releases that can impact both currencies.

They often are statistics that are important for central bankers, such as figures linked to consumer spending, growth, and employment. Monetary policy decisions from the BoC and the BoJ are also major fundamental drivers of the CAD/JPY, as they influence the demand and supply of both currencies in their respective economies.

Plan Your Trading

Now that you've chosen your trading strategy and decided whether to go long or short on CAD/JPY depending on the current trading environment and your price forecast, you should solidify your plan of action.

This is where your trading plan comes in.

Think of it as a roadmap for your CAD/JPY trades, as it should outline set-ups to expect before entering and exiting the market and risk management tools to implement.

Trading triggers could for instance be moving average crossovers, an exit from RSI overbought/oversold territory, weaker momentum and confirmation/reversal patterns with increased volume.

Popular money management rules could include position sizing, a maximum percentage of capital to trade on each position, a weekly maximal gain/loss, as well as stop loss and take profit positioning with the risk/reward ratio.

A well-defined trading plan usually helps traders make trading decisions based on analysis, not emotions, which strengthens trading discipline.

Develop Good Trading Habits

Mastering Forex fundamentals, understanding how to trade the CAD/JPY and choosing your Forex trading strategy are likely to help you build a solid trading foundation, but it is only half the battle.

To potentially be more successful, you should also focus on cultivating a strong trading mindset. This involves developing good habits by learning how to deal with key trading mistakes, knowing how to control your emotions when trading, improving your trading execution skills and using tools to evaluate your trading strategies, such as a trading journal.

CAD/JPY Trading - Frequently Asked Questions (FAQs):

What kind of currency pair is the CAD/JPY?

The CAD/JPY belongs to the minor currency pairs, also called minors. These are usually currencies from major economies that do not include the American Dollar (USD) and that are slightly less traded than majors such as the EUR/USD (EURUSD).

What affects the value of the CAD/JPY Forex Pair?

There are several factors that can influence the CAD/JPY exchange rate. Monetary policies in Canada and Japan, geopolitical tensions, commodity prices, natural disasters, and speculation are among the most influential things for the CAD/JPY pair.

When does the CAD/JPY currency pair potentially offer the most opportunities?

Volatility often brings a higher number of trading opportunities but also creates higher risk. The most active trading hours for the CAD/JPY are during the Asian and European trading sessions. The release of major economic data, such as GDP, CPI, and employment figures about Canada and Japan can also provide higher volatility.

How can I start trading the CAD/JPY?

Once you've mastered the fundamentals of CAD/JPY trading and feel comfortable with your trading strategy, you can consider opening a live trading account with Plus500. Once funded, navigate the platform and locate the "CAD/JPY" currency pair to get started with pair trading. You can either execute a market order (buying or selling at the current price) or set a limit order (specifying your desired entry price). Remember to determine your position size and utilise appropriate risk management tools before confirming your trade.