Momentum in the Yen Crosses Key to a CAD/JPY Range Setup

01/21/2009 11:05 am EST

Focus: FOREX

Many of the yen crosses have already made the move for significant bearish breakouts, but a few notables have held back. Should these liquid pairs hold back the tides, CAD/JPY may be set for a sharp rebound on a major range bottom.


Why Would CAD/JPY Hold a Range?

Levels to Watch:
Range Top: 75.50 (Trend, Pivot, Fib)
Range Bottom: 87.15 (Multi-Year Range Low)

From a fundamental perspective, there is considerable risk in approaching a CAD/JPY congestion setup. While this pair is not as highly correlated to risk trends as its pound or Australian dollar counterparts, it nonetheless retains its sensitivity to the yen's status as primary safe haven for the currency market. What's more, a significant amount of scheduled event risk can stir up volatility and redirect longer-term growth forecasts.

The risk of a breakout from the highly visible CAD/JPY range is tangible. However, the technical level of support is significant in itself. The 70.60/95 zone has been a range low for the past three months, and has similarly held up a previous base low some years ago. Tails are numerous in this area, so daily closes hold greater consequence.

Suggested Strategy

Long: Half-sized entry orders will be set at 71.45, which will actually require a bullish turn.  
Stop: An initial stop at 70.05 is well below past months' intraday tails. To secure profit, move the stop on the second lot to break even when the first target hits.
Target: The first objective equals risk (140) at 72.85. The second target will be 74.25.

Trading Tip - Many of the yen crosses have already made the move for significant bearish breakouts, but a few notables have held back. Should these liquid pairs hold back the tides, CAD/JPY may be set for a sharp rebound on a major range bottom. Our suggested strategy works with this premise, but accounts for this being a relatively risky proposition. In essence, a long position in any yen cross inherently find correlation to general risk trends-currently a volatile market dynamic. Therefore, our setup looks to use half-sized entry orders to reduce risk and allow for a wider stop. What's more, our entry is set above current spot, which would require a rebound from this pair to take one more step towards assuring a bullish reversal that holds with support. Should spot drop below 69.50 before we are in a position, we will cancel any open orders, as the market environment will have shifted. Furthermore, we will cut lingering positions by Wednesday's close, as this is an active setup and should trigger well within the next 12-18 hours. It is also important to note that this position is a partial hedge to the USD/JPY exposure that we have established with yesterday's setup-an additional benefit towards lowering risk.

Event Risk: Canada and Japan

Canada - Uncertainty hangs over the Canadian dollar's future. Can the nation's economy and financial markets indeed weather the global crisis better than the United States, or is this wishful thinking that will consistently be discounted through loonie depreciation? These concerns will be partially answered through developments in business activity going forward, and an unpredictable market dynamic. However, there will also be scheduled event risk that could have an immediate impact on volatility, as well as a lasting influence on the fundamental outlook for the economy. On deck for the end of the week, we have two key market movers: Retail sales and the consumer price index series. Through the most recent growth figures, Canada seems to have actually seen a boost in growth through the second half of 2008, but this is unlikely to last through fourth quarter data. With November's retail sales report, we will receive an updated read on consumer spending, a vital component of overall growth going forward. CPI will look to confirm the BOC's forecasts for inflation to turn negative for two quarters of 2009, but as a confirmation, its impact on the currency will be relatively limited.

Japan - Your typical economic releases have never had much of an impact on the Japanese yen, as the currency has instead found a greater sense of purpose as a measure for risk appetite. This will almost certainly remain the case over the coming week. However, preparing for shifts in risk is very difficult, as such events are rarely foreseeable. On the other hand, there are a few issues developing now that may evolve into something more pressing over time, including the financial difficulties of a few major banks, details on where US officials will spend the second half of the TARP funds, and signs that the UK government has to expand it bailout efforts significantly to stabilize its economy. Looking at the traditional economic docket, the Bank of Japan should be monitored just in case. With a specific release time, the central bank will have to lay out any efforts beyond rate shifts that they plan to take relatively soon.


By John Kicklighter, Currency Strategist,

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