CAD/JPY is about to retest the top of a major range, and with top tier catalysts coming in the next two weeks, we could see a big move for this pair.
What’s coming up and will they push CAD/JPY to break the range or will the bears take back control quickly?
CAD/JPY Top of Range Retest
CAD/JPY has been on the move thanks to a recent shift in global risk sentiment, moving positively to hurt the yen in the process.
The prospects of an economic recovery as lockdown restrictions were being eased across the globe sent traders towards risk assets like higher-yielding currencies and oil, and away from the safe havens like the Japanese yen.
It’s also likely that the Loonie got some support from recent updates from Canada, most notably not-so-dire commentary from the Bank of Canada (e.g., BOC’s Wilkin’s says increase in asset purchases “not part of our design right now”, BOC Governor Poloz reiterates that the bank’s best case coronavirus scenario remains within reach).
But CAD/JPY is about to retest a very strong resistance area around 78.00 – 78.50, which turned the bulls away three times in March. If retested, will the bears take control again?
Well, risk sentiment will likely have to swing negative once again for resistance to hold, something that’s not even remotely predictable these days as the world battles the coronavirus pandemic and as a global economic crisis brews.
But another catalyst could be the updates from Canada, first the GDP update this week, but more likely, next week’s Bank of Canada monetary policy meeting and Canada’s employment updates will be bigger factors on where the Loonie goes next.
GDP is likely to disappoint as recent PMI data indicates further weakness (Canada’s Ivey PMI falls to 22.8 in April vs. 26.0 in March, Canada March factory sales slump by the most in over 11 years), and as far as the BOC meeting, I think with Poloz already being relatively positive, the odds are probably better than 50/50 that the Loonie could fall on the event (either from a “buy-the-rumor, sell-the-news” scenario or the BOC changing their tune to a bit more negative if GDP data disappoints).
So with that, I’m going to play the range in favor of the yen over the Loonie, starting with a small nibbler position at the top of the range.
Since this is a swing play I play to hold for one to three weeks, I’m going with the weekly ATR as my stop guide, and my initial target will be the bottom of the range.
Here’s what I’m doing:
Short half position CAD/JPY at 78.00, max stop at 80.25 with 0.50% risk, initial target at 75.00
I’m only risking 0.50% of my account on this trade, and I’ve got a potential return-on-risk of around 1.33:1. Again, this is my starter position, and if the trade goes my way with the fundamentals/geopolitical themes supporting the trade, I’ll look to increase my position to maximize my potential gain.
If the market does make its way to the 75.00, I’ll re-assess to see if I should take profit or add to the position at that point. If my orders aren’t triggered by the end of the week, then I’ll look to close them down before the close on Friday.
Be sure to manage your risk and avoid overexposure.
What do you guys think? Are you watching CAD/JPY for a potential swing position as well? Let me know in the comments section below!
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