Double Oil Shock Fuels CAD/JPY Rally Amid Global Yield Surge

Brent's break above $90 is having a double-edged effect on the CAD/JPY currency pair. Not only is it strengthening Canada's terms of trade and supporting the Canadian Dollar, but it's also pushing global bond yields higher and increasing pressure on the Yen.

The surge in oil prices has improved Canada's balance of trade and supported the petro-currency, while renewed energy and freight inflation has kept global yields elevated. Meanwhile, the Japanese Yen is facing increased funding pressure due to its widening yield disadvantage compared to other major currencies.

Unlike June's rally, which was largely driven by Yen weakness, Canada's own economic data are now contributing to the CAD/JPY strength. May's GDP rose 0.3% m/m, beating forecasts and expanding across 13 of 20 sectors. July's labor data also showed a surprise jump in employment, while headline inflation accelerated from 2.8% to 3.0% y/y.

However, the BoC hike discussion has been reopened due to these strong economic indicators, but it's still uncertain whether this will translate into policy changes. The risk of Japanese intervention or a Bank of Japan rate hike remains a concern for CAD/JPY bulls, which could potentially derail the rally towards 120.