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Increasing risk-aversion strengthens Yen

On the basis of strong retail sales and hawkish statement by Carolyn Wilkins, Bank of Canada’s senior deputy governor, we had forecasted a rally in the CAD/JPY pair on June 26th. The article also provided 83.80 and 85.80 as the ideal entry and exit levels, respectively.

Additionally, we had expressed our intention to go long in the Forex market and simultaneously purchase a call option in the binary market. The currency cross rallied as anticipated to hit a high of about 86.80 in a week. That gave us profit in both trades. Now, on the basis of arguments made herewith, we expect a trend reversal in the CAD/JPY pair, which is trading at about 87.20, in the days ahead.

North Korea’s test of an intercontinental ballistic missile, capable of hitting the US mainland, has escalated geopolitical tensions and turned the markets nervous. The UN Security Council passed a resolution condemning North Korea’s action, but fell short of imposing new sanctions.

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The uncertainty has increased the demand for the Yen, which is considered as a safe haven currency. Over the course of last month, there has been reports of discussions at the Bank of Japan, about the withdrawal of the stimulus. That is also a reason for the Yen to show signs of strengthening.

The crude oil, after rallying for eight days, fell sharply on Wednesday. The US West Texas Intermediate crude futures lost 4.1% or $1.94 to close at $45.13 per barrel. International benchmark Brent crude plunged 3.7% or $1.85 to end the session at $47.76 per barrel. The oil market has once again turned bearish after a report from Thomson Reuters showed that the OPEC’s exports increased considerably in June. The quantum of oil exported by OPEC increased to 25.92 million barrels, up 450,000 bpd from the previous month, and 1.9 million bpd more than last year. The sharp decline in the price is expected to have a negative impact on the Canadian dollar. Thus, fundamentally, we can expect the CAD/JPY to move southwards in the near future.

The currency pair has started declining after failing to cross the resistance at 87.70. The MACD indicator has made a negative divergence with the exchange rate. Thus, technically, this may lead the pair down to a level of 84.40.

CAD/JPY Pair: July 7th 2017

CAD/JPY Pair: July 7th 2017

In the currency market, we would like to establish a short position in the CAD/JPY pair near 87.70. The stop loss and take profit levels are 88.60 and 84.40, respectively.

Likewise, to create a similar setup in the binary market, we are looking at the possibility of buying a low or below option valid for a period of one week. We would enter when the pair trades near 87.70 in the currency market.

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