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CAD/JPY’s Channel Presents Range Opportunity

CAD/JPY’s Channel Presents Range Opportunity

2010-03-25 20:15:00
John Rivera, Currency Analyst
Share:
cad1  How stable is the CAD/JPY Range?
 
Levels to Watch:
-Range Top:       91.00 (Fibo, Range, Pivot)
-Range Bottom: 81.00 (Range, Pivot)
 
A rebound is risk appetite helped extend yen losses and throw support behind commodity dollars. Commitments from European leaders to back stop Greece’s debt following aid from the IMF, helped ease fears of it becoming a contagion for the region. Although it wasn’t the most desirable solution for the Euro other risk sensitive pairs are benefitting from the resolution to the issue. Strong Canadian fundamentals have also driven the pair higher as the outlook for Canadian interest rates has improved. However, the prospect of tightening from central banks could fuel pessimism and lead to a reversal. 
 
Channel resistance at 91.00 stands in the way of an extended move higher for the pair. If the barrier holds then we could see a sharp reversal However, the pair has cleared the 38.2% Fibo of 125.58-68.49 at 90.29 which has turned away the CAD/JPY its past two tests. 
 
Suggested Strategy
  • Short: Place an entry at 89.90-below Fibo resistance and the psychological level of 90.00
Stop: Set the stop to 90.90-100 pips in risk 
• Target: The first target is 88.02-20-Day SMA followed by 87.74-3/22 low.

Trading Tip – The Yen has been under pressure the past two days despite fluctuating risk sentiment. Markets are starting to look beyond the issues in Europe and at the improving global economy. Expectations that the U.S. added 167K jobs in February, has raised the outlook for yields in the U.S. and Canada which depends on demand from its southern neighbor. All signs are pointing toward more CAD/JPY gains which give us little confidence in this set-up. However, markets remain susceptible to the news cycle and a developing concern could emerge to drive fears and support for the Yen. Despite, the forecasted job growth in the U.S., the unemployment rate is expected to remain at 9.7%. An elevated unemployment rate in the world’s largest economy could go a long way toward deterring demand for risky assets and generating yen support. Traders should also monitor oil prices as they are a main driver of “loonie” price action. Currently we are seeing a developing wedge which is a signal for a potential breakout. A bearish crude rally could sink the pair and give us the needed price action to make our strategy profitable. 

Event Risk for Canada and Japan
 
Canada – The Canadian economic calendar is barren with the January GDP report the only market moving release. Signs of growth have been evident in the commodity driven economy and it would take a huge surprise to either the upside of downside in the backward looking indicator to generate a major reaction. Broader risks trends and oil prices will be the main drivers of price action until we see manufacturing and employment figures in April. 
 
Japan – Japanese fundamentals have very little impact on price action as the BoJ is expected to remain on hold over the next three years. However, the consumer price report bears watching as policy makers main concern is deflation. If prices continue to decelerate then we could see the central bank look to take initiate quantitative easing measures. Minutes from the last policy meeting showed conflicting outlooks for growth. Some members view risks balanced and others seeing further downside. Industrial production and household spending will provide insight into domestic growth and should be monitored to assess the longer-term picture. 
 
cad2

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