CAD/JPY has been trading below a falling forex downtrend line on its 1-hour time frame, as price has been making lower highs recently. A potential pullback could take place, with CAD/JPY bouncing off the 94.00 support zone.
The Fibonacci tool applied on the latest swing high and low indicates that the 61.8% Fibonacci level might be tested, as this lines up with the trend line and 94.50 minor psychological mark. To top it off, it also lines up with a former support area.
Stochastic is moving out of the oversold zone for now, indicating a return of buying momentum. If it reaches the overbought area when 94.50 is tested, it could be a sign that price is ready to move back down to its previous lows or make new ones.
Shorting at 94.50 with a stop above the trend line and a target of new lows could make a good return-on-risk, and adjusting the stop to entry once price reaches 94.00 could help protect profits.
Forex Downtrend Forecast
Recall that the Bank of Canada (BOC) recently shifted to a more dovish stance as Governor Poloz said that he is serially disappointed with the Canadian economy. Apart from downgrading growth forecasts, Poloz also mentioned that the recent rise in CPI wasn’t result of economic improvement but rather a one-off surge in oil prices and a weaker Loonie.
Meanwhile, the BOJ has insisted that they are not looking to ease anytime soon, as Kuroda noted that the Japanese economy continues to recover moderately. He also mentioned that the negative effects of the April sales tax hike are likely to fade soon.
Risk aversion also favors the Japanese yen for now, as the geopolitical risk dominating the world headlines has weighed on higher-yielding currencies. The yen has advanced even against the US dollar, its safe-haven rival.
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