CAD/JPY Descending Channel Provides Swing Trading Opportunity

The Loonie-Yen pair has consolidated in recent weeks, after retracing approximately 600-pips in March and April that would pare back its 2010 losses. A move to risk-aversion has greatly benefited Yen-crosses over the past few weeks, and the CAD/JPY pair is no exception, given the market sentiment that that Loonie is viewed as a risky asset. With the pair finding a psychologically significant floor at a major Fibonacci retracement level, momentum to the downside to break said floor could be running out of steam. Our long-term bias for the CAD/JPY pair remains to the upside, given strong data out of Canada of recent, and muted rate hike expectations for the Bank of Japan for an indefinite period of time, considering low inflation, low growth, and additional credit needed in order to help rebuild following the tragic natural disasters and ensuing nuclear crisis in the middle of March. Accordingly, with the CAD/JPY pair sitting in the middle of descending channel that has been carved out since the end of March, coupled with the necessary fundamental trigger to push Loonie-based pairs to the upside, a swing trading opportunity has emerged for traders seeking to collect profit on the CAD/JPY pair.

Levels to Watch:

-Range Top: 85.330 (Trend)

-Range Bottom: 80.340 (Trend)

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

• Long: Place an entry at 83.286
• Stop: Set the stop to 82.286 (May Low, 100-pip risk)
• Target: The first target is 84.228 (100-SMA, move up stop to 83.679), second target is 85.048 (50-SMA)
• Timeframe:5 to 10 days

Trading Tip – The CAD/JPY pair has been mostly range bound since its approximate 1300-pip surge from the March 17 low to the high on April 8. Since then, it has traded mostly to the downside, and for the month of May, the CAD/JPY pair has found itself trading in a 300-pip sideways channel, above 82.286 and below 85.285. The recent downturn has been the result of the market’s shift away from risk-appetite. On a technical basis, the pair looks as if it could break back towards the upside, and once again test key moving averages. With a floor of 82.286, representing the May Low as well as the 76.4 Fibonacci retracement on the March 17 to April 8 move, there is strong support in the zone if the pair were to continue to decline. A drop below this could signal a test of the Range Bottom of 80.340. That being said, given the strong uptick in growth data today from Canada coupled with a Bank of Canada rate decision tomorrow, it appears that the fundamental triggers necessary to trigger a strong Loonie are on the horizon. The daily RSI is rising once more, now at 41. While the MACD Histogram and Slow Stochastic oscillator both continue to give bearish signals, they have indeed begun to turn towards a long play; the MACD Histogram differential is barely bearish, at -4, and the %K and %D have started to trend higher once again, at 24 and 38, respectively. The rate of change to the downside for the Slow Stochastic oscillator has also slowed, suggesting a pivot soon.

Event Risk for Canada and Japan

Both countries have some data due tomorrow; with Japan have more events on the calendar than Canada over the next 24 hours. However, the most important event is due before the start of the North American session, with a rate decision out of Canada headlining event risk over the next day.

Canada – The Bank of Canada is widely expected to leave rates on hold at 1.00 percent, as the Overnight Index Swaps shows a meager 2.0 percent chance of a 25 basis points hike at the meeting tomorrow; 74.0 basis points have been priced into the Loonie over the next 12-months. A stronger domestic currency has insulated the world’s 11th largest economy from rising price pressures, negating the necessity for a rate hike at the next meeting. Additionally, while the aggregate growth figure was considerably stronger-than-expected today at 3.9 percent (versus 3.3 percent) annualized for the first quarter, the resilient Loonie is likely to weigh on net exports over the next few months, softening the headline growth figure; the Bank of Canada agrees, with a growth forecast of 2.0 percent for the second quarter of 2011. Rates could be on hold for some time.

Japan – Data out of the Pacific Rim nation is heavy over the next 24 hours, with six events classified as ‘medium’ importance or greater. The two most important releases come early in the Asian session on Tuesday, headlined by household spending and industrial production. Regardless of data, the Yen has been appealing as a hedge against risk, and will likely to continue to be so long as debt concerns persist. Accordingly, due the appreciating value of the Yen relative against the Euro and the U.S. Dollar, an intervention always remains a possibility in order to weaken the Yen.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com