We have to give ourselves a big pat on the back for yesterday’s call on CAD/JPY. It was the best trade in the forex market over the past day as it rallied 237 pips.

Here is the updated chart:

There is nothing not to like about this chart. The sell off on Friday is followed by a perfect morning star formation with a close above Friday’s open. Moreover, the move higher stalled just at the former support line. We said yesterday that our initial target was 93.50 and the market topped out at 93.60 before pulling back.

The catalyst for the move higher in CAD was a hawkish Bank of Canada statement. We foreshadowed this in yesterday’s note. Here is what the BOC said about its conditional committment to keep rates low until the end of Q2: “The need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus.” 

For the yen, the catalyst for the slump was the positive tone in equity markets. Stocks worldwide have rallied about 1%.

Now that we’ve taken up plenty of space lauding our efforts (we wish they all went this perfectly) the question is, where do we go from here?

We continue to like long CAD positions. The absolute best time to buy a currency is when a central bank embarks on a tightening cycle. Here we are at the very precipice of what could be a long-term move higher in interest rates.

In the short-term, however, the situation might be stretched. We will definitely be holding long positions but looking to add on any weakness for a move to our target of 100. The market is struggling at the aforementioned trend resistance and we may see some consolidation down to 92.80. That would be our initial buy point. We would cover on a move down to 92.50 because that would target 92.05. If we do see a move to the low 92s, we will be adding agressively.

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.

CAD/JPY is like a runaway train. It has gone nearly straight upward since the beginning of March. We have been monitoring this and on March 11, with CAD/JPY at 88.42 we wrote that: “We really like CAD/JPY and see 90.00 as a relatively easy target.”

It was an easy target as it rallied to 90 one week later and was never out of the money. After that, however, was when things really got interesting.

Since March 23, CAD/JPY has had only one losing session and has gained nearly 600 pips, creating a parabolic chart.

We know one thing about parabolic charts — you don’t fight them. When a chart is as powerful as CAD/JPY, there is no telling when it will end. There will be analysts who come out and say it’s overbought and say to wait for a pullback. Meanwhile, the market goes higher and higher.

The forex market is keeping a very close on the Canadian dollar at the moment. USD/CAD is approacing the October low of 1.0207 and there will almost certainly be a breakdown if we can close below that level.

Elsewhere, the stars a beginning to align for CAD strength. Oil is above $80 and in a solid uptrend, stocks are near the 52-week highs and M&A activity is starting to pick up.

We can’t help but like the CAD/JPY chart.

The pair has been in a fairly well-defined range of roughly 79-90 for the past year. Most recently, however, we have seen a succession of lower lows. Now, we have broken through resistance at 88.44 and are trading at 88.42 currently.

The initial break came yesterday but the market eventually closed below the resistance. Today, with just an hour of trading left, thait will be another battle. If we close above 88.44, we really like CAD/JPY and see 90.00 as a relatively easy target.