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CAD/JPY Channel Waits For BoC Tightening To Begin

CAD/JPY Channel Waits For BoC Tightening To Begin

2010-05-27 20:04:00
John Rivera, Currency Analyst
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RT-10-05-27-01

How stable is the CAD/JPY Range?

• A return of risk appetite has the yen under pressure and commodity dollars finding support. China announced that they were a long-term investor in the Euro-zone which eased fears that the Asian power was diversifying away from the region. It remains to be seen if today’s optimism will mark a shift in sentiment or is a minor relief rally. Nevertheless, it may be enough to bring back “loonie” bulls with expectations for a BoC rate hike next week.


• The CAD/JPY has bounced from the lower bound of long-term channel and although we missed the initial move there remains profit potential with the 200-Day SMA at 86.93 providing a second set-up. The lower bound is establish by connecting the 7/9, 11/27,5/7,and 5/25 lows. The last test of the support line led to a 1000 pip reversal.

Suggested Strategy
• Long: Place an entry at 87.50-above the 200-day SMA
• Stop: Set the stop to 86.00 - 150 pips in risk
• Target: The first target is 90.56 - 5/18 high followed by 92.00

Trading Tip – There is still a great deal for concern over the potential impact of the debt issues in Europe. Moreover, the U.K. and the U.S. two of the largest economies are facing their own monumental budget deficits which has markets projecting Greece’s problems on them which paints a dour picture for the global economy. However, we have seen markets become too pessimistic with the credit crisis fresh in their minds. There is solid growth being generated across the globe especially in Canada and those countries that are outperformers could see their currencies benefit from an end of the panic. That is why we are looking for the relief rally to continue and the prospect of a BoC rate hike adds to the case. Yet, we must confirm that the improved outlook is here to stay and not just a small retracement before a continuation of the bearish trend.

Event Risk for Canada & Japan

Canada – The looming BoC rate decision may overshadow any prior fundamental releases with economists calling for a 0.25 rate hike. A change in monetary policy could signal the beginning of a tightening cycle and additional rate hikes which could spark “loonie” support. The first quarter GDP report will proceed the central bank meeting and solid growth figures could lead traders to positioning themselves for the anticipated rate hike and adding to current bullish sentiment.

Japan – Japanese fundamental data rarely impacts price action and that should be the case going forward. However, the consumer price report is an important release because deflation remains the biggest concern for policy makers. Additionally, if prices begin to decelerate at a faster pace it could raise concerns for the stability of the country and could diminish the attractiveness of the yen as a funding currency which generate volatility.

RT-10-05-27-02

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