By Giles Coghlan, Chief Currency Analyst at HYCM
CADJPY has been weakening recently on a number of factors. Last week there was a sharp fall in global equity markets. This was due to both profit-taking, after a disappointing Fed meeting, as well as the return of COVID-fears. A number of US states are reporting record increases in COVID-19 cases.
This negative sentiment has weighed on the commodity currencies (AUD, NZD, and CAD). Furthermore, remember that CAD is an export economy and that oil markets heavily impact the movement of CAD.
Oil markets pull back
Over the last few weeks the run-up in oil has been impressive) but the run has now come to an end recently on a number of factors:
1. Falling demand on COVID-19 second waves fears. The IEA has said that CoVID-19 is causing the biggest decline in global energy investment in history and investment in energy across the world is to drop by 20% or by $400 USD this year vs the previous forecast of 2% growth.
2. Recent OPEC+ production cuts extension is not enough to keep prices afloat in the face of falling demand
3. Finally, last week on June 09, the IEA cut 2020 world oil demand by 120K BPD to 8.34mln bpd which is a further decline in demand showing that the COVID-19 induced slowdown is continuing.
All of the above further weaken the Canadian dollar as oil is one of its major exports. This is a medium-term case for ongoing CAD weakness.
COVID-19 cases return
Here is a reminder of why the prospect of a second wave of COVID-19 is a concern that markets keep in the back of the mind. The Spanish flu’s second wave was far worse than it’s first by around 5 times. Take a look at the chart below to see not only the second wave but also the multiple waves.
As long as cases keep building in the US then expect risk-off flows into the JPY. Furthermore, global output pressures from COVID-19 will only grow the longer that economies are not back to work. As it stood last week the world bank had some pretty grim forecasts going forward.
World Bank says COVID-19 to shrink 2020 global output by 5.2%
- Advanced economies expected to shrink 7.0% in 2020.
- Emerging markets to shrink 2.5% (first since aggregate data became available in 1960).
- Per capita GDP global contraction is to be the deepest since 1945-46 as WW2 spending dried up.
- Updated forecasts show more damage to the economy that April estimates that looked for a 35 contraction in 2020.
All of the above gives a CADJPY a firm bias to the downside. The main risk to this outlook would be if there is some positive COVID-19 news that will result in the JPY weakening.
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