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CAD/JPY bulls have been trying, but can’t seem to break above a minor psychological area of interest. Does that mean a reversal is right around the corner? Let’s take a look.

CAD/JPY Resistance Holds Again?

CAD/JPY 4-Hour Forex Chart
CAD/JPY 4-Hour Forex Chart

On the four hour chart above of CAD/JPY, it looks like that after a swift rebound from the 85.00 major psychological handle, the market is back to retesting a minor psychological area around the 87.50 level. This rebound was likely due to the fast move higher in oil prices (Canada’s main export is oil), rallying on the impending disruption in oil operations from Hurricane Ida this past week.

But now it looks like the bulls are having a rough go of trying to break above that area, which was a previous support level back in July. Is it now a technical scenario of “broken-support-turned resistance?”

Besides technical arguments for a potential bearish turn, we just got the latest GDP read for the second quarter of 2021 for Canada, showing a -1.1% decline vs. an expectation of +2.5%. The Loonie sold off briefly on the news, likely on the idea that future outlook updates will be revised lower, especially with the world now battling with another rising wave of covid-19 cases since mid-July.

This could lead to more selling pressure on the Loonie, especially if we see a pullback from the Hurricane induced rally in oil, and if net negative updates from more Canadian economic updates this week, including manufacturing PMI, building permits and trade balance data.

We’ll be on the watch for those economic updates, and if they do disappoint, in combination with negative covid-19 developments and downgrade oil demand outlook updates, before considering a short position in CAD/JPY. If that scenario plays out, we could see the downtrend in CAD/JPY since its early June top around 91.00 continue and retest the 85.00 handle some time in September.

What do you all think? Are bears about to take control of CAD/JPY once again? How will oil demand play out as the coronavirus pandemic remains an issue to economic growth? Let me know in the comments section below!

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