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CAD/JPY Range Waits On Risk Aversion

CAD/JPY Range Waits On Risk Aversion

2010-03-10 21:45:00
John Rivera, Currency Analyst
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0310rt1

How stable is the CAD/JPY Range?
Levels to Watch:
-Range Top:       88.50 (Range, Pivot)
-Range Bottom: 82.00 (Fibo, Pivot, Trend)
•A week of risk appetite has benefitted commodity dollars and sunk the yen as the carry trade takes center stage. Optimism is showing signs of fading as markets take inventory of current valuations in light in the anniversary on the 2009 bottom. Prices may have outpaced underlining fundamentals which could lead to a retracement of risky assets which would set up the CAD/JPY for a failed test of the upper bound of the current range.
•A second failed test of the upper bound at 88.50 could be a sign that bullish conviction is fading. We could see the pair look to test 90.24-38.2% Fibo of 125.62-68.45-where it has failed at twice before. A convergence of the SMA’s leaves the range bounds as the most likely sources of S/R. The lower bound is formidable as it represents the 38.2% Fibo of 68.45-90.34.  

Suggested Strategy
Short: Place an entry at 87.40-below today’s low to confirm a shift in sentiment.
Stop: Set the stop to 88.50-upper range bound
Target: The first target is 85.47-3/3 low and current 200-Day SMA, followed by 83.16-2/25 low

Trading Tip – Upside potential remains for the CAD/JPY with a possible test of Fibonacci resistance, which is why the strategy is looking to take advantage of a potential retracement. The current bullish trend for the pair has been driven by continued demand for risky assets. A 46% rise in China’s exports in February helped add to prevailing optimism and raise the outlook for global growth. However, concerns are growing that rising Chinese inflation will lead to tightening from the central bank in an attempt to curb domestic growth. The news cycle continues to influence risk trends which we saw with the Greece credit issues and continued confidence that the troubled nation will emerge from its debt issues are also adding to optimism. We will need to see a clear shift in risk sentiment to have confidence in this set-up as the current trend points higher. If we haven’t seen the desired price action ahead of the Canadian labor report we may sit in the sidelines until the post release volatility subsides before taking a position. However, an unexpected job loss could be the catalyst for an extended bearish “loonie" move.

 

Event Risk for Canada and Japan

Canada – The upcoming net change in employment report and unemployment rate will be the greatest upcoming event risk. The economy is expected to have added another 16,000 jobs building upon the 43,000 gain in January. A disappointing labor report will dim the outlook for domestic growth which could weigh on the Canadian dollar. Weak demand from the U.S. has been offset by demand from emerging markets and a strong domestic growth could help propel the economy forward until its southern neighbor catches up. International merchandise trade and manufacturing shipments are also important as they will help determine if foreign demand remains robust and current levels of growth are sustainable.

Japan – Final readings of GDP and industrial production should provide little insight as they typically show minor revision if any at all. Japanese fundamental data typically has little sway over yen price action and the upcoming calendar shouldn’t alter that relationship. However, a BoJ rate decision is worthy of traders attention despite the expectations that the central bank will remain on hold. The Japanese economy is expected to remain in a deflationary period for the next three years and the government has called upon policy makers to help in the fight against slumping prices. Therefore, could see new quantitative easing measures or other efforts to bring about price stability. There could be a Yen reaction to a new course in monetary policy, but ultimately risk trends will dictate longer –term direction.

0310rt2

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