Economists at HSBC expect both the Japanese Yen (JPY) and the Canadian Dollar (CAD) to trade sideways, followed by modest strength.

Move higher in USD/CAD looks overdone, relative to risk appetite

We expect the BoJ to end its ultra-loose policy this year, with a formal YCC removal in March, followed by an exit from negative interest rate policy in 2Q24. At the same time, the Fed is expected to start its easing cycle this year. With narrower rate differentials on horizon, we believe the JPY will stage a modest recovery against the USD this year.

We expect rate cut cycles for both the Bank of Canada (BoC) and the Fed to begin in June. Lower US bond yields could pull USD/CAD down through both rates and risk-appetite channels. But in case of near-term risk aversion, there is still some buffer for the Loonie, as USD/CAD looks elevated relative to risk appetite.