A build-up of short bets on the Yen and the net-long positioning on CAD has helped reduce the volatility of CAD/JPY’s decline in recent weeks. With Japan’s election just around the corner and an expectation of an Abe victory, sentiment on JPY remains bearish. And with the consensus view being for another BOC hike in Q2 2018, CAD/JPY could be of interest over the coming weeks if all goes to plan.
The weekly chart presented a series of higher swing lows as it headed for the 88.88-89.32 resistance zone and looked ready to confirm a long-term inverted Head & Shoulders. Yet the move lower in August poured cold water on the setup, before finally breaking higher in September. That the cross has since turned resistance into support, we have a pivotal zone which could mark a swing low on this chart.
Although the week is yet to close, but we appear to be on track for a bullish engulfing candle. That its low has also respected previous support and follows on from a low volatility retracement makes the potential setup more compelling.
However, before we get too bullish on it potential, it is worth pointing out that each rally higher since the October low has been smaller, with less trajectory. Yet on the other hand, as this is the weekly timeframe it could still provide bullish setups on lower timeframes if momentum continues to favour it.
The daily timeframe is also carving out a series of higher swing lows, and recent price action suggests upside momentum could be building once more. The low volatility retracement found support at the 38.2% Fibonacci level, formed a bullish hammer and inside day as compression kicked in before moving abruptly higher with a range expansion day.
Assuming the swing low has been seen, price action suggests the markets could be eying the 91.64 high. As price action on the weekly timeframes is also locked in an uptrend, traders may be gunning for the September 2015 swing high of 93.26.
However, as promising as the technical picture looks for the bull camp, dangers do lay ahead which could either shake one out of a position or turn the tide.
In a few hours FX traders will be treated to a host of data from Canada including inflation and retail sales, so we’ll continue to steer clear of CAD crosses until Monday the earliest. And then there’s Japan’s elections to content with. Elections can be a far more complex beast as it can have a large impact on fiscal and monetary policies and, in this particular instance, a defeat for PM Abe could have a huge impact on the Yen as he is a supporter of quantative easing.
So this puts CAD/JPY firmly onto the backburner until the coast clears, where we’ll reassess the technical picture to see if a tradable opportunity presents itself. And if we are to find that momentum continues to favour the bulls, then we’ll be on the lookout for low volatility entries towards, or even beyond the 91.63 high.