Potential signal:
- I am buying right here, with a stop below the 114-yen level.
- I am aiming for 116.50-yen level.
The Canadian dollar dropped to kick off the Tuesday session but looks like it is going to continue to find buyers against the Japanese yen.
CAD/JPY
The Canadian dollar initially fell against the Japanese yen during trading on Tuesday, but we continue to see a lot of interest in the region of 114 yen and as a result, I think you have to look at this as a short-term floor in the market. With this, I believe it is probably only a matter of time before we revisit the top of the potential range, which means the 115.50-yen level.
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Breaking above the 116-yen level could open up a big move to the 117-yen level. Anything below the 114-yen level on the downside probably opens up a move down to the 200-day EMA.
Interest Rate Differentials and Central Bank Action
That being said, keep in mind you get paid to hold this pair to the long side, despite the fact that the Canadian economy is fairly weak, the interest rate differential still favors Canada over Japan. The Japanese just raised their interest rate to 1%, which is probably about as good as it gets in Tokyo, with the reality being that the Japanese economy simply cannot hold high rates with the indebtedness that the Japanese find themselves in.
Because of this, I do not like the Japanese yen, but I do recognize that the Bank of Japan intervened about 6 or 7 weeks ago and that is something that you have to pay attention to, but the Japanese probably won't be too overly concerned about the Canadian dollar specifically. With that, I believe this is a market that ultimately will try to get back to that crucial 116-yen level, but right now we are just grinding to the upside. If you're a swing trader, this is a potential opportunity.
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