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Day one: potential CAD/JPY trade idea

Our potential strategy: holding a favourable bias on CAD/JPY; will look at trade perimeters after today’s candle.

Japan
Source:Bloomberg

The CAD was one of the best performers last week, with traders continuing to look at strategies that benefit from low volatility. Traders are also keen to look favourably at economies that are seeing better signs of inflation and will look to buy the corresponding currency.

In Canada we have a seen of better data of late, with strong housing starts, retail sales (growing 1.1% in the April print) and headline inflation growing 2.3% - the highest pace since February 2012. In fact, we are seeing something of a housing boom in Canada, with extremely easy monetary conditions fuelling a rise in property prices in the major cities, such as Toronto and Montreal.

In Japan, the key release will be the Q2 TANKAN report tomorrow (at 09:50 AEST), with economists expecting a pick-up in the outlooks for both small and large companies. Capex is also expected to have grown 6%, arresting the disappointing numbers seen in Q1. Poor numbers could see the JPY weaken a touch on the view that corporate Japan is struggling with the rise in consumption tax. Traders will also focus on views around the likely path of inflation and the level that the JPY needs to be for corporates to break even.

Technically the pair is trending strongly and continues to print higher highs and lows.

Last week we saw CAD/JPY close above the April 4 high of 94.84 and the 50% retracement of the 99.21 to 90.66 move we have seen this year. It appears the bulls are firmly in control and while there are not many FX pairs trending, CAD/JPY is.

The 200-day moving average was breached last week, for the first time since January, which could also be important.

On Friday we saw a hanging man candle. These candle patterns can be a signal of a pending reversal, however we do need to see a confirmation candle and that could play out today. It’s for this reason that I will wait to see if this plays out and will look at long trades if we don’t see a negative candle in today’s daily chart.

CAD/JPY chart

CAD/JPY chart

CAD/JPY chart

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