The Canadian dollar has been a top performer in 2021, lifted higher by expectations of a pandemic recovery and the rally in oil prices. Is this week’s dip in CAD/JPY another buying opportunity?
CAD/JPY Uptrend Pullback
In case you missed it, the Canadian dollar has been the top performing currency so far in 2021, benefitting from the recovery narrative that’s lifted both risk currencies and oil prices. We’ve also seen economic data from Canada posting better-than-expected news recently, including today’s release on Canadian retail sales that showed a 4.0% bounce in February.
But the Loonie is seeing some pullback this week, likely a reaction to falling oil prices (Crude oil steadies but still on shaky ground due to Europe lockdowns) and another move higher in global bond yields (Barrons: Treasuries are selling off again, sending 10-year yield above 1.7%). This includes CAD/JPY, which is now trading -1.15% from this week’s high of around 88.08. Is this pullback another buying opportunity?
From a technical standpoint, we can see that that pair has fallen to the Fibonacci retracement area and seems to have found buying support at the 50% Fib level. We’ve also highlighted a bullish divergence pattern forming as the stochastic indicator made a higher ‘low’ while price formed a lower ‘low.’ This could draw in technical traders to play the longer-term trend.
If bond yields stabilize here and Europe can control the recent rise in COVID cases / unsuspend its vaccination programs, the recent fears that have hit oil may fade and lead to another round of support for CAD/JPY. It may take some time, but this is the likely scenario to play out over the next few weeks, making the pullback in CAD/JPY one to consider for a potential long position.
Also keep in mind though that this rally is pretty long in the tooth, originally starting back in October under the 80.00 psychological handle. The possibility of a deeper pullback is something to consider if bond yields don’t stop rising, but given the current environment, that makes for a more compelling case to play the trend higher and recovery narrative with a deeper discount. Let’s also consider that if Canadian data continues to improve, speculation of policy tightening by the Bank of Canada may start to be aggressively priced in as well.
What do you all think? Are you watching CAD/JPY for buying support? Or is this just the beginning of a swing move to the downside? Let me know in the comments section below!
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.