Strong CADJPY Trend Channel May Counter Risk Trends

We have been following CADJPY for a few months now. The trend channel that has developed since the beginning of the year is perhaps the most consistent technical formation in the currency market.

[B]Why Would CADJPY Hold a Range?[/B]

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         ·         [B][U]Levels to Watch:[/U][/B]

         [B]-Range Top:       89.00 (Channel Top, Fib)[/B]

         [B]-Range Bottom: 86.00 (Pivot, Fib Confluence)[/B]

         

         ·         Risk appetite pulled back into Friday’s close after experiencing significant volatility through most of the week. However, this backstop in sentiment was more aggressive for the dollar (helped along by comparatively strong economic data); while the Japanese yen crosses hovered near the top of their recent ranges. Looking ahead to next week, the dockets are relatively light; but the G8 decision could pick up the ball on sentiment. 

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         ·         We have come back to CADJPY’s technical layout a number of times over the past few months. The steady rising trend channel that has cut through round figures since February is as progressive a move as can be found anywhere in Forex. There is a series of daily highs at 89 that coincide with a moderate Fib and the channel top for resistance.

         

         [B][I]Suggested Strategy[/I][/B]

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         ·         [B][U]Short[/U][/B][B]: Half-sized entry orders will be placed at 88.80 to improve risk/reward scenarios.[/B]

         ·         [B][U]Stop[/U][/B][B]: An initial stop of 89.80 covers volatility on the range top, but not a channel bias. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]

         ·         [B][U]Target[/U][/B][B]: The first objective equals risk (100) at 87.80 and the second[/B][B] target will be 86.30. [/B]

                         [B]Trading Tip –[/B]We have been following CADJPY for a few months now. The trend channel that has developed since the beginning of the year is perhaps the most consistent technical formation in the currency market. However, our last endeavor for a range trade with this pair was abruptly stopped out. There is still significant risk assigned to the setup this time around. The technical and fundamental bias behind this pair is generally bullish. However, unlike our last position, sentiment has tempered its run (and there are few major pieces of event risk that threaten to catalyze risk appetite one way or the other in the coming week); while technically, we are at the top of our channel and there has been confirmed congestion to build a case for a meaningful pullback. Our strategy looks for an entry that is near the top of this past week’s range of highs to allow for a better risk/reward profile. The initial stop is set 80 points above our resistance. This buffer is significant enough for a spurt of volatility to bend a false break on a horizontal price band but perhaps not for a trend channel with such an aggressive bias. The evolution of risk trend is tantamount next week; but its drivers are uncertain. If a downswing doesn’t develop within the first 36 hours of active trade through the new week, we will cancel all open orders. What’s more, we will cancel them should spot hit 86.50 before we are entered. 

[B]Event Risk for Canada and Japan[/B]

[B]Canada –[/B] The Canadian economy isn’t as strong as many market participants and commentators originally believed. Over the past week, the government reported the country was suffering its worst recession since 1991 through the first quarter and the Bank of Canada laid out a pessimistic forecast for a recovery thanks primarily to the aggressive appreciation in the currency. This provides the market something to stew on next week. The pace of economic recovery is a key driver for the broader currency market; so the recent downgrade in the Canadian forecast could significantly undermine the currency’s recent strength. For standard economic fodder, there are a few notables that will give a more timely view of a few sectors; but their overall market-moving capabilities are limited. For the housing market, starts and new home prices are key readings for general health. The physical trade report is top event risk.

[B]Japan –[/B] Despite a record breaking economic slump, officials from both the Bank of Japan and Cabinet have forecasted the worst of the recession was now past the island nation. This has yet to pan out however and such optimism will counter fundamental traders’ positions until data pans these ideas out. Looking out over the coming week, economic data will help little in addressing this big ticket issue. The current account balance, Eco Watchers survey and consumer confidence reports are all timely; but are showing only modest divergence from record declines. The GDP number expected next week is influential enough; but it is lagging as a final reading. Risk trends will be the undisputed driver of price action for the yen over the immediate future.

                                              [B]Data for June 7 – June 14[/B]

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                                   [B]Data for June 7 – June 14[/B]

                                                     [B]Date (GMT)[/B]

                                   [B]Canada Economic Data[/B]

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                                   [B]Date (GMT)[/B]

                                   [B]Japan Economic Data[/B]

                                                     Jun 8

                                   Housing Starts (MAY)

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                                   Jun 7

                                   Current Account Balance (APR)

                                                     Jun 10

                                   International Merchandise Trade (APR)

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                                   Jun 8

                                   Eco Watchers Survey (MAY)

                                                     Jun 10

                                   New Housing Price Index (APR)

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                                   Jun 10

                                   GDP (1Q F)

                                                     Jun 11

                                   Capacity Utilization Rate (1Q)

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                                   Jun 12

                                   Consumer Confidence (MAY)