CAD/JPY rally foiled at the 200-day SMA, oil prices provide headwinds

CAD/JPY plunged -14.5% from the July high to August low in five weeks. Yet it has taken 14 weeks for CAD/JPY to rise just 8%, which suggest the rally from the September low is corrective and prices may be poised to break to new lows in the coming weeks or months. Two doji’s have formed, neither of which closed above the 50% retracement level of the prior selloff. The weekly RSI (2) is also overbought zone to further show the cross is making hard work of continued gains. And when I look at the daily chart, I see the potential for a reversal to begin taking place.

CAD/JPY reached a 4-month high by Thursday, but the 200-day SMA asserted its authority by acting as resistance before momentum turned lower. The week’s high also fell just shy of the monthly R1 pivot point, suggesting the 111 handle is a decent level of resistance for now.

There has also been a loss of bullish momentum in recent weeks. The rally form the 108 area shows CAD/JPY has made harder work of bullish gains, and the past two and a half weeks has essentially seen prices move sideways in a choppy range, with a false break to a new high last week. And this has allowed a bearish RSI divergence to form on the daily RSI (2) and RSI (14).

Furthermore, the gains on CAD/JPY have not been tracked with oil prices which remain a relative underperformer. And oil prices could continue to struggle if Trump pushes ahead with flooding the market with increased output. The BOJ are also slightly more hawkish, although they may refrain from being so should volatility remain elevated.

For now, the bias is to fade into rallies towards 111 in anticipation of as move lower towards 108. Whether we’ll see a larger move to new cycle lows likely requires much lower oil prices and a more-dovish BOC (or hawkish BOJ).

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

How to trade with City Index

You can trade with City Index by following these four easy steps:

1. Open an account, or log in if you’re already a customer 
   
   • Open an account in the UK
   • Open an account in Australia
   • Open an account in Singapore
   
   
2. Search for the market you want to trade in our award-winning platform 
3. Choose your position and size, and your stop and limit levels 
4. Place the trade