When event-driven volatility and fundamentally-derived momentum fade, technicals will step in to direct the market. This is the situation with CADJPY. While there are notable indicators and events scheduled over the coming week, there is little reason to believe they can drive a breakout on their own accord. This leaves the door open to clear and weather-tested technicals.
CAD/JPY – The Pair to Short-Term Range Trade
[B]Why Would CADJPY Hold a Range?[/B]
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 86.00 (Trend, Fib, Double Top)[/B]
[B]-Range Bottom: 80.50 (Trend, SMA, Fibs, Pivot)[/B]
· The [vacillation of risk appetite](http://www.dailyfx.com/story/strategy_pieces/weekly_range/Forex_Strategy_Outlook__US_Dollar_1243264940181.html) the primary current for the currency market; yet its direction and intensity have been notoriously difficult to benchmark. Looking ahead to the coming week, a series of rate decisions and other top tier economic indicators could supply the necessary fuel to get things moving again; but there is no single indicator that promises to catalyze sentiment across the entire market. For CADJPY, Canadian GDP is the top concern.
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· Technicals for USDJPY have been notoriously ‘loose’ for over the past few months. Initially 96 was a prominent pivot backed by a notable Fib retracement and moving average. The current floor is seen around 94 in the next Fib retracement in the same series and through a long-term pivot. However, false breaks have been frequent here.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Short[/U][/B][B]: Entry orders will be placed at 85.65 as an aggressive start that allows for controllable risk.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 86.65 is well above the double top and long-term trend. 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 84.65 and the second[/B][B] target will be set to 82.65. [/B]
[B]Trading Tip –[/B] When event-driven volatility and fundamentally-derived momentum fade, technicals will step in to direct the market. This is the situation with CADJPY. While there are notable indicators and events scheduled over the coming week, there is little reason to believe they can drive a breakout on their own accord. This leaves the door open to clear and weather-tested technicals. The immediate concern for our strategy is the prominence of resistance and its ability to hold back the steady – yet choppy – advance from the May 18th swing low. From a long-term perspective, we have a prominent descending trend that began with the November 7, 2007 swing high as the primary marker for the long-term bias. Offering further stability to a ceiling, there is the 50 percent Fib retracement of the September 2008 to January 2009 bear wave and recent double top at 86. Despite the arguments for a successful trade, it is more important to note the dangers. Medium- and short-term momentum is clearly bullish and high volatility can provide instigate the breakout procedure. As such, the suggested entry point and trade management rules look to better control the risk profile. Timing is another issue. It would be highly risky (and time consuming) to speculate on anything more than a reasonable retracement within the rising trend channel pattern. We will cancel all open orders by the middle of the US session on Friday. If this takes more than a week to play out, we will cut out.
[B]Event Risk for Canada and Japan[/B]
[B]Canada –[/B] From a big-picture perspective, the Canadian economy is heavily dependent on its US counterpart. However, the contrast between the two actually sets Canada into an even brighter contrast as one of the best performing major economies. However, caution and dour forecasts from policy officials has consistently ground down the good will developed through data that reflects a relatively strong credit conditions and mild recession. However, it has been the case over the past year that the strongest performers often have the greatest distance to fall. Therefore, fundamental traders will keep an especially vigilant eye on the health of credit conditions and whether Canada can outpace its global counterparts for a true economic recovery. The indicators due after the weekend will present among the clearest signs for growth projections we have seen in months. The first quarter GDP and current account numbers will benchmark the recovery. However, it is the Bank of Canada’s projections and quantitative easing efforts that will be the true guide.
[B]Japan – [/B]Risk appetite is the primary driver for the Japanese yen. In the past month, there has been a clear and significant shift in sentiment as equities, bond yields, commodities and high-return currencies have all rallied. How long this positive shift lasts however is anyone’s guess. Objective fundamentals continue to erode, there are still major pitfalls to credit conditions going forward and the outlook for higher returns is bleak. This leaves the single currency in a precarious position that is defined by the fickle sentiment and the hope for capital returns alone. In the meantime, the docket is lined with major milestones for long-term growth forecasts. Retail sales, consumer spending, employment, factory activity and housing will all be measured by economic data.