Bank of America Initiates Short CAD/JPY Trade on Tariff Risks, Yen Intervention Outlook

Bank of America strategists on Tuesday recommended a short position on the Canadian dollar against the Japanese yen (CAD/JPY), citing a combination of rising North American trade tensions and the potential for a stronger yen.

The Trade Thesis

Analysts at the bank pointed to renewed uncertainty surrounding the United States-Mexico-Canada Agreement (USMCA) as a primary catalyst for expected Canadian dollar weakness. "USMCA uncertainty has risen on reports of fresh 50% tariffs on select goods," strategists Alex Cohen, Shusuke Yamada, and Marcus Boman wrote in a client note.

On the other side of the currency pair, the bank anticipates a floor for the Japanese yen. The strategists believe that currency intervention from Japanese authorities is likely to prevent further depreciation. "FX intervention is likely to act as a near-term backstop against further yen depreciation," they noted. They also highlighted the possibility that Japanese public pension funds could increase their domestic investments, which would further support the yen.

Trade Specifics and Market Context

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Bank of America outlined a clear structure for the trade recommendation, providing specific price levels for institutional and professional clients:

• Entry: 115.65
• Target: 112.00
• Stop Loss: 118.90

At the time of the report, the CAD/JPY pair was trading at 115.59, up approximately 0.1% on the day. The pair has gained about 1% so far this month, indicating the bank's position is a contrarian view against the recent trend.