Is risk-on sentiment back? It sure looks like it as safe haven currencies fall on the session to the comdolls. This could be the start of a new leg higher in risk, making this technical setup in CAD/JPY one to watch for longer-term players.
Return to Longer-term Uptrend in CAD/JPY?
Traders have gotten back on the risk-on train this week with the Evergrande Debt situation in China de-escalating a bit today, and after the Fed continued to hold off on giving an exact taper start date during yesterday’s monetary policy statement. Risk currencies (like the Loonie), equities, and crypto assets are on the rise, while gold, bonds and safe haven currencies are seeing red on the session.
While there are plenty of uncertainties for traders to stay cautious on (e.g., pandemic developments, global growth slowdown, etc.), a potential market contagion event from China and the Fed slowing down monetary support were likely the two biggest concerns to drag down risk-on sentiment over the last week or so. With those themes fading from the forefront at the moment, that could mean more weakness for the Japanese yen and comdolls strength in the short-term.
With oil prices likely to rise on falling oil inventories, as well as positive data coming out of Canada recently (Canadian inflation rate remains high, three months of robust employment gains in Canada), the Canadian dollar looks to have good odds to outperform for now. And looking forward, if the upcoming Canadian GDP and jobs updates continue to show strength, then the odds rise further of the Loonie outperforming as it further strengthens speculation of a rate hike soon from the Bank of Canada.
In terms of price action, CAD/JPY bears have been pounding on the market, creating lower ‘highs’ since the end of May where we see the pair top out around the 91.00 major psychological handle on the daily chart above. But the bulls have repeatedly held strong at the 85.50 minor psychological handle, with another big reversal this week after the Fed meeting. This is creating a consolidation pattern, and thus an argument for a potential breakout move down the road.
Again, if positive risk sentiment holds for the next few weeks and oil continues to rally, this could lead to a fresh bullish move in CAD/JPY as longer-term players hop back into play the much longer-term bull trend that goes back to the 2020 pandemic lows around 73.50. We’ll be on the watch for a break above the falling ‘highs’ and a break above the 88.00 handle before considering and planning out a longer-term play on CAD/JPY.
Of course, if the driving themes change, possibly on worsening pandemic conditions, the Evergrande debt situation worsening to contagion levels or another black swan event, then we’ll obviously favor the Japanese yen in that environment and be on the watch for a break of that major support area around 85.50 for a potential short position.
What do you all think? Will the consolidation in CAD/JPY lead to a bullish breakout? Or will geopolitical/pandemic conditions worsen to draw the bears to the pair?
