The breakdown in the head-and-shoulders pattern is forming
From a purely technical perspective, this is one of the more interesting charts in the FX space right now. The target measure for the drop is at least a move towards 80.00, which is roughly 480 pips down from where we are right now.
The head-and-shoulders pattern itself is one thing but the break below the 200-day moving average (blue line) and double-bottom all adds to the bleak technical picture for the pair as we look towards the end of the week.
All that being said, the fundamental picture is one that will be tough to make sense of.
Canada is among the frontrunners in the vaccination race and the economy is still staying on the path to recovery with the latest virus surge due to the delta variant not really taking off in the country as it is elsewhere globally.
Adding to that is despite worries in the oil market on a stronger dollar and a hit to the demand outlook, it is tough to envisage a total meltdown as virus restrictions this time around are surely not going to be anywhere as bad as they are last year.
Not to mention that as vaccinations pick up, rightfully so will economies and demand conditions will follow accordingly based on that presumption.
Also, not forgetting that the BOC is not straying away from normalising/tightening policy so there’s also a strong case of divergence on that front.
Nonetheless, the focus in the market right now is that commodity currencies are out of flavour until something else enters into the spotlight. And as a trader, there’s no point in arguing with the charts as that ultimately defines a trade and the risks involved.
For now, it’s looking like there’s going to be a whole lot more pain in CAD/JPY before it gets any better. In that regard, it will not be wise to try and catch a falling knife.
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