The sharp advance risk appetite that rode on earnings optimism last week has so far stalled this week. This is not an immediate signal for a reversal but a tempering point to prevent continuation with the trend. And, the longer the market hesitates to revive its rally, the more likely it is that there will be a reversal.
[B]Why Would CADJPY Hold a Range?
• [U]Levels to Watch[/U]:
-Range Top: 86.00 (Pivot, Fib, Trend)
-Range Bottom: 78.75 (Pivot, Fib)
• [/B]Risk trends have settled over the past 48 hours and that is favorable for CADJPY range conditions. Like most other Japanese yen crosses, this pair is responsive to the oscillations in market sentiment. Earnings data and quarterly GDP figures from large economies present the greatest threat to calm markets. From within the fundamental bounds of these two economies, the BoC statement and Japanese employment are key indicators to watch. [B]
• [/B]Depending on how well behaved volatility remains, CADJPY could be looking to develop the last phase of a prominent head-and-shoulders formation. The confluence of a long-term 50% Fib retracement, internal trendline and clear pivot at 86 could define the right shoulder of this pattern. Levels like this are rarely ‘clean’ so buffer room is necessary. [B]
[I]Suggested Strategy[/I]
• [U]Short[/U]: Half-size entry orders will be placed at 85.55, which falls within this week’s range.
• [U]Stop[/U]: An initial stop of 86.55 is set to provide enough room for any aggressive tails on a turn. To secure profit, move the stop on the second lot to breakeven when the first target hits.
• [U]Target[/U]: The first objective equals risk (100) at 84.55 and the second target is set to 80.90.
[/B]
[B]Trading Tip[/B] – The sharp advance risk appetite that rode on earnings optimism last week has so far stalled this week. This is not an immediate signal for a reversal but a tempering point to prevent continuation with the trend. And, the longer the market hesitates to revive its rally, the more likely it is that there will be a reversal. Considering how many markets are meeting bullish resistance, a turn could accelerate into a full blown reversal in risk appetite quickly. To take advantage of this setup, we need both a pair that is sensitive to the developments in underlying sentiment and provides strong technical boundaries. CADJPY fits the bill with a very prominent head-and-shoulders pattern holding back the tides while the influences of the Japanese yen and correlation to commodity prices reconciles the market’s direction. However, convincing technicals and temporary stability does not absolve risk. An unforeseen, exogenous event could catalyze a market-wide breakout. With this in mind, we have set stops wide enough for a buffer on a false break but not so far as to increase the potential notional losses in a true break. To further refine the risk profile, position size has been reduced to hold down the notional risk and the first target is set well within an average day’s range. Open orders will be canceled before Friday’s close.
[B]Event Risk for Canada and Japan[/B]
[B]Canada [/B]– Scheduled, fundamental event risk is tapering off for Canada before the week ends and the currency itself does not have a high profile link to sentiment. After the Bank of Canada’s rate decision and the short policy commentary that followed yesterday, the market seems to be well-versed with the central bank’s forecasts and policy approach through the near-term. This may have significantly discounted the market-moving potential of Thursday’s Quarterly Monetary Policy report. This official release from the central bank offers insight into growth, credit conditions, inflation projections and what policy is under consideration. Aside from the inclusion of changes to abnormal policy efforts, the likelihood that this report will deviate from the comments and projections after the rate decision is low. Looking ahead to next week, the docket is light. Only the price indices for industrial product and raw materials are due within a week’s range. However, the monthly GDP figure for May will be released the following day.
[B]Japan [/B]– When it comes to ascertaining what the primary fundamental influence behind the Japanese yen is at any moment, it typically a safe assumption to think that the market’s favored safe-haven currency is following the pace of risk appetite. There will be an ongoing interest in earnings activity; but this dynamic will loosen its grip on price action as time wears on and fewer blue chip firms are left to report. An interest in growth may also balance the ongoing battle between risk/reward as speculators look a source for yields and capital gains through economic expansion. Both the UK and US are due to report GDP over the coming weeks. Looking at its own numbers, the Japanese calendar will pick up after the weekend; but the data’s influence on price action is questionable. Retail spending, industrial production and employment are all notable figures due later next week.
