The falling trend line on CAD/JPY’s 1-hour forex time frame has been holding since the start of the month, but price has already made an upside forex breakout. This could indicate that the downtrend is already over and that a reversal might take place.
However, stochastic is already in the overbought zone, indicating that buying pressure could subside. Price is finding resistance at the 94.50 minor psychological level and a rally past this area could be a sign that further gains are in the cards.
Going long at another retest of the trend line or on an upside break past 94.50 with a stop below the 94.00 handle and a target at the 96.00 area for a swing trade could yield a 3:1 return on risk.
Forex Breakout Scenario
This could be a false breakout though, as the BOC has recently shifted to a dovish stance while the BOJ has reiterated that it is not looking to ease anytime soon. Recall that Poloz said that he is serially disappointed with the Canadian economy and that the pickup in inflation wasn’t spurred by actual economic improvements. On the other hand, the BOJ has reiterated its positive assessment of the Japanese economy, saying that the recovery is moderate and that the sales tax hike effects will soon fade.
This could lead to range-bound behavior for CAD/JPY later on though, as the somewhat similarly cautious monetary policy biases could lead to a tug-o-war between buyers and sellers.
If so, CAD/JPY might find support from 93.50 to 94.00 and resistance at 94.50. A strong break past 94.50 could confirm that an uptrend is in the cards, especially since rising oil prices could provide more support for the Canadian dollar later on. On the flip side, risk aversion could continue to keep the Japanese yen afloat.
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