Why CADJPY is worth a look

A remarkable recovery for markets as events over the past 48 hours has combined to lift the gloom and prompt a relief rally in risky assets.

The move started following better than expected economic data in China as the Caixin services PMI rose to its highest level in 3 months. Also helping was a withdrawal of the extradition bill by Hong Kong’s leader Carrie Lam, better than feared Q2 GDP in Australia and a decision to approve a law to delay Brexit.

Finally, overnight new easing measures were announced by the Chinese State Council that have the potential to reach 0.75-1.00ppt of GDP in the coming quarter. While the stimulus measures are viewed as defensive in nature, they will help to offset the trade war induced slowdown.

The good news continued this morning as White House officials confirmed that trade talks between China and the U.S would resume in Washington “in the coming weeks”. Risk markets have continued to build on yesterdays rally.

After being caught on the wrong foot earlier this week by yet another false break in the U.S. dollar index, I am a little reluctant to chase today’s rally in risk assets into key resistance levels. (e.g., the ASX200 at 6000, the S&P 500 at 2976). That said after the easing in tail risks, I am willing to look at some selective upside exposure on dips.

Catching the eye is the Canadian dollar after the Bank of Canada (BoC) held its policy rate steady at 1.75% overnight and delivered a more neutral statement than expected. Buoyed by the relative hawkishness of the BoC the Canadian dollar has outperformed. Assuming risk sentiment is maintained for a few days at least, CADJPY appears well placed to build on its recent gains.

Traders might like to consider building CADJPY longs on dips towards the near-term support at 80.30/80.10, that comes from the dozen or so daily highs that occurred in August. The stop loss should be placed below 79.10. The initial target would be a move towards 81.00/20 with scope to extend towards trend channel resistance at 82.00.

Source Tradingview. The figures stated are as of the 5th of September 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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