pair to range trade

CADJPY Epitomizes the Wedge Formation in the Yen Crosses

Most of the yen crosses are developing very broad but very clear ascending wedge formations. This is fundamentally and technically unique as many of the other risk-sensitive pairs and markets have shown relatively tight congestion over the past few weeks at the very top of bullish trends. This is not a small break from the norm in any sense; and suggests the looming threat of a breakout or reversal in risk appetite and many of the markets won’t necessarily translate into this currency’s cadre.

How stable is the CADJPY Range? •    Levels to Watch: -Range Top:       88.25 (Fib, Double Top, H&S) -Range Bottom: 82.00 (Trend, SMA, Fibs) •    The standard economic event risk from the Japanese docket typically has little impact on the currency. Canada’s data is a little more influential; but the offerings are otherwise light. The true engine for CADJPY activity over the coming week is without doubt underlying sentiment. Benchmarking the possible catalysts for a dramatic shift in risk appetite is frustratingly imprecise. However, speculative interests will have free reign through Wednesday. •    Technically, CADJPY is still far from the boundaries of its range. Support is our primary interest with a rising trend that connects March, July, September, October and November swing lows meeting a major 38.2% Fib and 200-day SMA around 82. However, it bears mention that the last five months of price action look a lot like a heads-and-shoulders pattern. Suggested Strategy •    Long: A reduced size entry order will be placed very near support at 82.35. •    Stop: Since reversals have been volatile in the past, a stop of 81.35 is warranted. To secure profit, move the stop on the second lot to breakeven when the first target hits. •    Target: The first objective is one and a half times risk (150) at 83.85. The second is 85.85.

Trading Tip – Most of the yen crosses are developing very broad but very clear ascending wedge formations. This is fundamentally and technically unique as many of the other risk-sensitive pairs and markets have shown relatively tight congestion over the past few weeks at the very top of bullish trends. This is not a small break from the norm in any sense; and suggests the looming threat of a breakout or reversal in risk appetite and many of the markets won’t necessarily translate into this currency’s cadre. On the other hand, where general trend parts ways; the reaction to volatility is distinct. Ultimately should key market proxies for sentiment start to rollover into bearish trends, the yen crosses are likely to follow. In the meantime, our strategy looks to take advantage of well-weathered technical pattern in CADJPY. Spot is still far from support; but we will wait until the market reaches that floor to maintain an attractive setup. Our entry is very close to support; which isn’t out of the question considering the depth reversals have plunged in the past few months. It is these same volatile spikes that demand a wide stop. Our 100 point stop at 81.35 does not cover the average lower wick; so we don’t want to see a slow approach to support when looking for a reversal. Considering the market’s distance from its technical boundaries and our objectives, this setup may take up to 3 to 5 days to execute. After that, we will cancel open orders.

Event Risk for Canada and Japan

Canada – The monthly employment data proved to be a significant disappointment for fundamental loonie traders. A sharp loss in jobs through October and an pickup in unemployment spurned burgeoning expectations for the world’s eighth largest economy to dive into a hearty recovery early. This has not only tempered growth forecasts; but it has doused the currency market’s other primary driver: interest rate speculation. With unemployment still near a 10-year high, there is little reason the BoC will act on the specter of inflation. For the week ahead, there are notable economic indicators scheduled for release; but they are not major market movers. Housing starts and the new homes price gauge will gauge the health of a sector that has performed well recently. Trade is the more critical figure for this export-based economy. In the end though, the risk appetite is the key to the loonie in the currency market. Though its yield is very low; the Canadian currency ends up tracking its Australian and New Zealand counterparts through its commodity correlation (as investors risk appetite has risen, their taste for crude, gold and other natural resources has climbed as well).

Japan – Though there is debate over whether the Japanese yen or US dollar make for the better funding currency; there is little doubt that the former currency has a clear connection to market sentiment. Risk appetite is still bullish; but the drive to new heights of optimism has been curbed some time ago. Investors are waiting for the next wave of capital to further the drive or the death knell in an aggressive bout of profit taking. As for the economic calendar, there are top tier releases; but the Japanese docket has long lost its influence over price action. The exception may be the 3Q GDP numbers. This is the one area where Japanese data can really weigh in.

 

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at jkicklighter@dailyfx.com.

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