CAD/JPY bears don't appear content with an 8-month low

In a few hours Canada release CPI data which is marked as a high volatility calendar. BOC raised for the third time this cycle in January, and markets are pricing the April meeting as coin toss for another hike. But if we are to see inflation over or undershoot expectations we’d expect price action to spike around the release. For this reason, CAD crosses are off-of the menu until the data is out of the way. But opportunities may await once the coast is clear.

Starting with the bigger picture, what appeared to be a great start to the year for CADJPY quickly turned into a rout. Its final push to 91.57 (which failed to test the 2017 high by a mere 6 pips) marked the beginning of an 8.5% decline, which took it to an 8-month low.

With the bear-camp clearly in control, we continue to seek opportunities to short CADJPY with a lower risk and higher probability entrance being the key objective.

The daily structure is predominantly bearish and retracements have been minor since the 89.43 high. Momentum has been strong enough to make light work of the 87.75 and 85.46 support levels, which merely served as a prelude to another leg lower. Following a low volatility retracement at 84.48, a bearish engulfing shooting star candle marked the end of the correction and paved the way for a decisive break lower to its 8-month low.

Yet whilst the stage appears set for a run towards 83.20 support, there are a couple of warning signals worthy of mentioning. RSI has formed a bullish divergence at these lows (albeit small) and is also technically oversold at 28. Moreover, yesterday’s daily close confirmation has found itself well below and beyond the lower Keltner band. Whilst these warning flags do not confirm a bottom is due, it does raise the potential for mean reversion to kick in at some point. And in some ways, we hope it does.

If we are to see price move higher form here, provided it is part of a low volatility retracement and remains beneath 84.48-84.54 (support becomes resistance) we’d be particularly interested in seeking a short setup. By retracing higher without being too aggressive it allows the potential reward to risk ratio to increase for a run towards 83.20.

If CADJPY fails to break lower today we could seek signs of compression on the daily timeframe next week and enter short on an intraday timeframe, if momentum begins to turn lower again.