Friday’s washout in CAD/JPY sent the pair down to key support. Today’ we traded below that support level early in teh session but later rallied to close higher. The rebound coincided with significant support, including the top of 80-90 range that was in place from June 2008 to mid-March 2010. It also touched off the 38.2% fibonacci retracement level of the rally we have seen since late February.
This chart looks very positive to us, as long as it stays above 90.00. That leaves a downside of 107 pips. On the upside, we see the potential for the chart to rally to 100 with 93.50 as an initial target.
The major risk in the next day is the Bank of Canada decision. We believe this chart is incorporating the hawkish bias we expect from the BOC. Policymakers in Canada have committed to keeping rates low until the end of the second quarter but with June fast approaching, we expect the Bank of Canada to show the first indications that it will embark on a rate-hiking cycle starting in July.
The risk is that the Bank of Canada emphasizes that it wants to continue to keep interest rates low. In that case, CAD/JPY could fall very quickly and we would want to exit the trade and re-evaluate.