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Pairs to Range Trade

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Congestion In The Yen Crosses Holds Up CADJPY Range

Fri, Feb 20 2009, 06:35 GMT
by John Kicklighter

DailyFX

Is risk appetite recovering? A rebound in the yen crosses would suggest just that; but constant pressure on equities and other financial assets argue the opposite. So, where does that leave CADJPY – perhaps securely in a range.

Why Would CADJPY Hold a Range?

• Levels to Watch:
  -Range Top: 75.50 (Pivot, Fibs, SMA)
  -Range Bottom: 72.35 (Trend, Fib)

• Risk sentiment well be the primary driver for CADJPY - and all of the yen crosses - as capital markets threaten new multi-year lows and global governments step up to try and wrestle control of the economy and markets from pessimistic consumers. Scheduled event risk could have its influence on volatility around notable technical levels. Friday brings both a BoJ economic report and Canadian CPI numbers – offering growth and rate implications.

• The pattern in CADJPY price action is similar to the evolution of price action for many of the yen crosses. An ascending wedge formation has developed since the pair reversed from its recent record low. Resistance for this cross is built around 75.50 where a confluence of a pivot, fibs and an SMA are holding back a young trend.

Suggested Strategy

• Short: Half-size entry orders will be placed at 75.30 to take advantage of the pivot level.

• Stop: Our initial stop will be set at 76.30. This cut out point could withstand a notable false break. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (100) at 74.30 and the second at 73.30.

Trading Tip – Is risk appetite recovering? A rebound in the yen crosses would suggest just that; but constant pressure on equities and other financial assets argue the opposite. So, where does that leave CADJPY – perhaps in a range. When looking for a fundamental driver for this pair, there is little difficulty in coming to the conclusion that general investor sentiment is the primary engine for direction. However, recently, we have seen the yen losing its correlation to flight-to-safety flows (with the dollar perhaps overtaking the Japanese currency’s position as USDJPY steadily rallies to new highs). This could disrupt the clear fundamental speculation that has aided traders so well in the past; but it could also stabilize CADJPY price action as market participants search for a key driver. In the meantime, the long-term (months) dominant trend holds to the downside, which helps to rectify the short setup in the face of recent bullish momentum. Nonetheless, as our strategy counters this short-term direction (and considering the width of our stops) we have cut our position size. To further lower our risk of an unfavorable break, we will cancel all open orders before Friday’s close or should spot hit 73.75 before our entry.

Event Risk Canada And Japan

Canada – Fundamentals have had a limited impact on the Canadian dollar in recent weeks. From the risk angle, a benchmark interest rate of 1.00 percent and a financial market that has shown relatively little impact from the global, financial crisis has left the loonie right in the middle of the spectrum. Growth forecasts – the other prominent driver – gives traders a little more to work with as the economy has been relatively buoyant despite the condition of its American counterpart. Looking at the coming week’s docket, we will see data that clues the market into speculation for both growth and interest rates. Through our window for entry, we will see the release of January inflation figures. At this point, price growth is below target; so its contribution will maintain support for further cuts. However, with rates already close to zero, this figure may have a greater influence on growth speculation as a measure for cost of living. Live positions will find additional event risk after the weekend in retail sales and current account releases. Exports and domestic consumption are key readings for GDP forecasts.

Japan – Over the past weeks, we have seen the Japanese yen loosen its correlation to general risk trends. This leaves fundamental traders in an uncomfortable position as they will now have to derive the catalyst for price action rather than looking to the key gauges for risk sentiment. On the other hand, we could see that scheduled event risk will have a more defined impact on the market as investors look at the safety and potential for returns in the world’s second largest economy. For the remainder of this week, only the Bank of Japan’s monthly report holds any influence. Central bankers will offer their assessment of economic activity and financial health for policy officials to build legislation around and speculators to benchmark their own forecasts with. In the latter half of next week, the market movers pick up. The round of inflation, consumer spending, industrial production will be a good starting point for the 1Q.

Published on  Fri, Feb 20 2009, 06:43 GMT