Tactically Bearish CAD/JPY on Dovish BoC, Unstable Risk Environment
Point to Establish Short Exposure: Retracement to 83.10/50 zone
Initial Target/Point to bring a stop to break even:79.50 (1W Forward 2 Std. Dev. Bearish Target based on 1W Implied Vol)
Swing Target (If not holding trade :)78.42 JPY per CAD (78.6% Fib of 2016-2018 Range)
Invalidation Level: 85.30 (38.2% retracement of 2018 Range)
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The Canadian dollar has been on the defensive lately especially after Bank of Canada chief Stephen Poloz appeared to have taken an April rate hike off the table. A key market that traders will look at to see how a rate hike is priced in is the Overnight Index Swap market, which shows different rate levels at different tenors based economic developments and central bank guidance.
A look at the falling probability of the hike can help you see how why the Canadian Dollar rate has recently weakened as the probability for a hike has fallen from ~70% to ~25% this week.
Falling Probability of a Bank of Canada Rate Hike Weakens CAD
Data source: Bloomberg
On the other side of the spectrum is the stubbornly strong Japanese Yen. The Yen has risen as Treasury yields continue to fall on disappointing economic data. Most recently US Retail Sales disappointed and the reappointment of the White House Sr. Economic Advisor with a Trump loyalist, Larry Kudlow seems to heighten the potential of an aggressive trade stance that results in retaliation from key global trade players like Europe and China.
Should such a retaliation take place, the Japanese Yen could see the further strengthening and the weak Canadian Dollar may be the path of least resistance for Yen gains.
A technical dashboard that I share on FX Closing Bell, Monday’s through Thursday shows CAD as rather weak per the RSI(3) to see short-term momentum. On the graph below, look to CADJPY for sentiment readings and standard deviations bullish and bearish targets. Given the analyst pick’s focus, we’ll be looking to the bearish, 1W 1SD Down and 1W 2SD Down targets to be hit in the coming weeks at 80.62 and 79.46 respectively.
Technical Dashboard Shows Persistently Weak CAD
Data Source: Bloomberg
Technical Outlook Favors Bearish Conviction
Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT
The key pivot on the chart is the 61.8% at 81.25. A breakdown below this level would indicate a further wash out of CAD longs and a move into JPY longs.
The next zone to the downside is 79.42/80, which is the 78.6% retracement of the 2016-2018 and the 261.8% Fibonacci extension of the double-top from the September-January double top with a neckline in November.
The invalidation on the bearish breakdown continuing is the 38.2% retracement of the 2018 range at 85.22.
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---Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.
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