It has been an eventful day for the Canadian dollar. The Bank of Canada opted to leave interest rates unchanged at 0.50% as been widely expected. The BOC also refrained from jawboning the currency lower and struck a neutral tone at its policy statement. This boosted the Canadian dollar, which has already been adjusting to rebounding oil prices. Speaking of which, crude oil rallied today on the back of the latest oil inventories data from the US Department of Energy. After last week's surprisingly large 10.4 million barrel build, the market was looking for a more moderate increase of about 3.0 to 4.5 million barrels this time. As it turned out, the DOE reported a build of 3.9 million barrels. As this was within the expected range, oil prices staged a relief rally. The data also showed a sharp decline in stocks of gasoline (4.5 million barrels) and distillates (1.1 million barrels). But Cushing stocks rose (by 690K barrels) and US oil output increased modestly. Overall, it was a mixed-bag report. But if oil manages to hold on to its gains now then this would be bullish for both oil prices and the Canadian dollar for the next several days. But as there has been no progress with regards to the OPEC and Russia oil-freeze deal, the potential gains for crude may be limited.
Among the Canadian crosses, the CAD/JPY pair is catching my eye for it may have already found a major bottom around the psychologically-important 80 handle. It should be noted that the Bank of Japan is still very much dovish, which should in theory weigh on the yen going forward, unless there is a sudden rise in risk aversion (which could happen if for example stocks or oil prices start heading lower once more). But in the absence of such developments, the daily chart of the CAD/JPY is looking… well, beautiful.
In addition to 80 being a psychological level, the 78.6% Fibonacci retracement level of the entire 2011-2014 rally came in around this area, at 79.50. More interestingly, this is also where the long-term bullish trend line converges. Yet even more interesting, there is a potential double bottom reversal pattern in the making. For all these reasons, I was interested to see how the CAD/JPY would behave around key reference points such as the broken resistance at 83.65 today. Well, as can be seen, this level has turned into strong support now. As a result, the CAD/JPY is in the process of forming a second bullish engulfing candle, which is further confirming the bullish momentum. The day hasn’t ended yet, so today’s candlestick may look different by the close of play. But if it finishes at or around the current levels then this would bode well for the bulls.
The key area of resistance that needs to break still is around 87.00 to 87.40. This area was previously support and resistance, and corresponds with the double bottom neckline. Should price move above here then further follow-up technical buying could be the outcome.
But despite all these positive technical indications, the CAD/JPY is not out of the woods just yet. The sellers will take heart from the fact that the bearish trend line is still in place and the main moving averages are pointing lower. They will first and foremost want to see the breakdown of some key supports now, starting with 83.65. But for now, it is the bulls that are in charge and so the path of short term least resistance is to the upside until proven otherwise.
Source: FOREX.com.
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