We also touched upon the recent dominating theme driving the yen of possible intervention actions from the Bank of Japan to limit yen gains. Remember that inflation pressure in Japan has some traders anticipating the idea of the BOJ tightening up on monetary policy down the road.
Risk sentiment turned negative on Thursday on both rising bond yields and this week’s slew of negative headlines from China, sparking a swift move lower in CAD/JPY. This bearish move was likely helped along further by Japanese inflation updates, which showed prices continuing to rise at a face pace, supporting speculation that the BOJ should normalize monetary policy sooner than many expect.
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We thought that if there were hints in the minutes that pointed to further tightening / restrictive policy being needed for longer than anticipated, then that could bring risk aversion behavior short-term (likely benefiting the yen) .
We kicked off the new week with a look at NZD/USD ahead of the highly anticipated interest rate decision from the Reserve Bank of New Zealand.
All put together, there was enough for forex traders to push CAD/JPY to not only the first technical target at the S1 pivot area, but also the S2 pivot target before the Friday close, likely resulting in positive outcomes for the strategy if the break-and-retest of the rising ‘lows’ pattern was risk managed well.
CAD/JPY hit the top of the watchlist on Wednesday after the pair broke below a textbook uptrending pattern in price. It looks like broad risk-off sentiment and intermarket influences were a driver as weak economic updates in China likely prompted traders to price in future global economic weakness, including less demand for oil.
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During the Tuesday U.S. session, Canadian inflation data was mixed but net hot with the headline CPI read coming in way above expectations and forecasts at 0.6% m/m. U.S. retail sales also came in very strong at 0.7% (0.3% forecast/previous read).
Since then, it’s been a steady move higher for the pair, even breaking through the top of the channel pattern, which turned into a couple of technical buying opportunities on a pullbacks. The rising moving averages also seemed to have been a strong buy area during the week.
But our main short-term focus was on the upcoming FOMC meeting minutes as that event would likely influence broad risk sentiment across the financial markets.
Before the event, the pair was already in a downtrend, fundamentally supported by weakening economic updates from New Zealand and China recently. We thought that if the pair bounced around the RBNZ event and if it appeared that the central bank’s concerns on the economy may start to outweigh inflation conditions, fundamental bears on the Kiwi may step back in short at better prices.
Again, outcomes are highly dependent on the risk management plan, which is unique to and the individual responsibility of every trader out there. And for those who risk managed around that quick move lower and took profits at target, you likely saw a very positive outcome.
But at the time of writing, XAU/USD was in bounce mode after creating a reverse head-and-shoulders pattern on the 15-minute chart. We thought the bounce could get as high as the R1 pivot point area if the move extended into the next trading session. Our thought was that unless we anti-dollar headlines / data popped up, this bounce could draw in fundamental sellers at better prices.
On Thursday, our FX strategists shined the spotlight on Gold as the precious metal has been trending lower against the Greenback. Given the rising risk-off environment this week, it’s likely that gold was losing its attractiveness to USD as a safe haven asset as bond yields rise on rising rate hike expectations.
Unfortunately for us, that pop wasn’t as high as we liked (to the confluence of falling moving averages and Fibonacci retracement levels) as the bears stepped just under the 0.6000 area to defend and keep the downtrend alive.
The argument is strong that this was a very effective strategy discussion on USD/CAD as the outcome was likely positive, even with simple risk management plans.
Our strategists had an extraordinary week with arguably four out of four strategy discussions catching solid moves in FX and gold!
But for those who were more aggressive on the risk management, it’s likely our discussion on NZD/USD turned into a positive outcome as the market is trading below our discussion price.
On Wednesday, the RBNZ hiked interest rates to 5.5% as expected, but noted that further hikes are still a possibility and that interest rate policy will likely stay restrictive for some time. The Kiwi popped right on the news, likely on commentary that interest rates will stay high for an extended period of time.
The R1 level drew in the bears, leading to a swift move lower during the Thursday U.S. trading session. We eventually saw a retest / break of the previous swing low and brief touch of our bearish target at the S1 pivot area before buyers took back control.
Our anticipation of global risk-off vibes played out well, so read further to see how fundamentals drove price and what lessons can be learned for your own trading!
Not too long after our discussion, CAD/JPY did rally higher back to the rising ‘lows’ pattern and rode it higher to the R1 Pivot area touched upon in our original post. This was also the previous swing high area, and this seems to been enough to draw in sellers to hold off further gains.
Fortunately for our bearish lean, not only did we not get any anti-dollar headlines, but weekly U.S. jobless claims and the Philly Fed manufacturing index came in better than expected. Also, bond yields continued to rise on Thursday, prompting further moves into the Greenback, especially as contagion concerns grew in China.
If that was the case, we thought that CAD/JPY could make it’s way lower to the S1 pivot level (107.50) or S2 (107.29) pivot levels if volatility spiked higher on the event.
On Tuesday, we eyed USD/CAD on the 15-minute chart, looking for a potential continuation of the uptrend with the help of the upcoming Canadian inflation updates and the latest retail sales data from the U.S.
This correlated with a drop in USD/CAD to the rising lows pattern marked on the original chart, which did seem to pull in buyers quickly as the pair bounced back to pre-release levels within the next hour or two.
Expectations were for Canadian inflation to ease while U.S. consumer activity was expected to accelerate a bit from June to July. And if those events played out as expected, the odds were pretty good USD/CAD would further draw in fundie bulls as well as technical bulls on a pullback.