CAD/JPY Points of Failure

CAD/JPY Points of Failure

CAD/JPY Points of Failure

The Canadian dollar should be trading much lower and the only explanation for today’s CAD strength is its strong trend and a slightly larger increase in Canadian 10 year yields compared to U.S. yields. Oil started the day sharply lower after key producers failed to reach an agreement to freeze production but the losses were short lived as reports of a strike in Kuwait sparked a U-turn that briefly took prices into positive territory. However the Kuwaitis were quick to respond, bringing in workers from Egypt and Bahrain to resume production and by the end of the day reports that output from the Northern fields have returned to normal sent oil prices back into negative territory. All of these conflicting headlines took the Canadian dollar on a rollercoaster ride but if we take a step back, production in Kuwait will be back to normal before we know it and the hope that oil producers will take steps to create a floor faded when the Doha meeting ended. This means oil prices will remain low creating ongoing pressure on Canada’s economy that should translate into weakness for its currency. We expect CAD to peak soon and begin a stronger correction. Meanwhile the rally in stocks drove the Japanese Yen traded lower against all of the major currencies. Although we could see a slightly stronger recovery in USD/JPY, gains will be limited as the downtrend in the dollar remains intact.

Technically, there’s a tremendous amount of resistance for CAD/JPY above current levels. Today’s rally stopped right at the 100-day SMA and above that we have the 23.6% Fib retracement of 2014 to 2016 decline followed recent spike highs and then a cluster of highs below 86.35. Support is at today’s low and then 82.

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