Bank of America (BofA) has initiated a short position on the Canadian dollar against the Japanese yen (CAD/JPY), citing rising uncertainty surrounding North American trade relations and growing expectations of support for the Japanese currency. The move reflects the bank’s view that increasing geopolitical and policy risks could weigh on the Canadian dollar while strengthening demand for the yen.
The strategy, outlined by Bank of America strategists Alex Cohen, Shusuke Yamada, and Marcus Boman, recommends selling the CAD/JPY pair at an entry level of 115.65, with a price target of 112.00 and a stop-loss level of 118.90.
Trade Tensions Cloud Canadian Dollar Outlook
According to the strategists, concerns over the future of the United States-Mexico-Canada Agreement (USMCA) have intensified following reports of fresh 50% tariffs on select goods. The renewed trade uncertainty is expected to put pressure on the Canadian economy, which relies heavily on exports to the United States.
The bank believes that any escalation in tariff-related disputes could undermine investor confidence in the Canadian dollar, making it vulnerable against safer currencies such as the Japanese yen.
“USMCA uncertainty has risen on reports of fresh 50% tariffs on select goods,” the strategists noted, highlighting the growing downside risks facing the Canadian currency.
Japanese Yen Expected to Find Support
On the other side of the trade, Bank of America sees several factors that could strengthen the Japanese yen in the coming months. Chief among these is the possibility of intervention by Japanese authorities if the currency weakens excessively.
The strategists believe that foreign exchange intervention could serve as a near-term floor for the yen, discouraging further depreciation and supporting its value against major global currencies.
In addition, they pointed to the likelihood of Japanese public pension funds increasing their domestic asset allocations. Such a shift would encourage capital to remain within Japan, creating additional demand for the yen and reinforcing its strength.
“FX intervention is likely to act as a near-term backstop against further yen depreciation,” the strategists said, adding that investors should also monitor the potential for Japanese pension funds to increase domestic investments.
Market Performance
Despite the bearish outlook presented by Bank of America, the CAD/JPY currency pair was trading 0.1% higher on the day at 115.59 and has gained approximately 1% so far this month.
However, the bank believes that mounting trade-related risks and supportive factors for the Japanese yen create an attractive opportunity for the currency pair to reverse course, making a short CAD/JPY position a favourable tactical trade in the near term.
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