Why Would CADJPY Hold A Range?

* Levels to Watch:
* Range Top: 70.90 (Range Low)
* Range Bottom: 75.50 (Fib, Pivot, SMA)

With CADJPY and other yen crosses testing the lows of their prominent ranges, there is substantial risk in trading a range with volatility high across the currency market. For a fundamental driver, this pair is highly sensitive to the shifts in risk sentiment. Should fears that the global recession is accelerating or major defaults are looming rise, this pair will see a sharp drop - and at this level, it wouldn't an event so severe to force a break.

Technically, this is a precarious position as well. While the range of support around 70.60/95 looks rather stable, we are at the very bottom of historical range. What's more, Wednesday's close has set a new official low for the exchange rate. Shifting momentum is clearly a necessity in calling a bottom on an otherwise steady bear trend.

Suggested Strategy

* Short: Far reduced entry orders will be set at 71.35 to take advantage of the range of lows.
* Stop: An initial stop at 70.15 covers previous tails, but won't hold up a burst in volatility. To secure profit, move the stop on the second lot to breakeven when the first target hits.
* Target: The first objective equals risk (120) at 72.55. The second target will be 74.05.

Trading Tip - Market conditions are still highly unfavorable for range-based setups - especially with risk trends still on the rise. For a highly speculative position however, CADJPY offers potential compensation that could match the danger inherent. From a technical perspective, this pair is bouncing off a string of swing lows that is holding up a temporary floor at the very low of its historical range. With risk sentiment still brewing and considering the pair has not broken a six-day decline that has covered nearly 950 points, this is clearly a situation where controlled risk is a necessity. Therefore, our suggested strategy looks for 'far-reduced' entry orders, which means the maximum loss in this setup should be set very small through position size. Beyond this, our stop is relatively wide, but not if we see sharp intraday swings (like those back in December) from current levels. There is no scheduled risk to threaten this setup, but we naturally do not want to stay in the market for too long as if a market as volatile as this one sticks near support it is likely a sign that a breakout is impending. Therefore, we will cancel all open orders in 24 hours time or should spot hit 73.50 before we are entered.
Event Risk Canada And Japan

Canada - Since the trade report crossed the wires this morning, there are no significant Canadian indicators scheduled for release through the rest of this week. This will leave traders to speculate on vague and tangential fundamentals for direction on the single currency. However, as the week wears on, speculative trends will take on a more singular interest - the outcome of next Tuesday's Bank of Canada rate decision. Economists are forecasting a 50 bps cut to 1.00 percent. At this rate, the Canadian monetary authority could easily match its American counterpart near zero - cutting one of advantages the loonie still holds over the dollar.

Japan - There is a modest level of scheduled Japanese event risk on the docket, but that will hardly influence the yen within the time frame of our setup. The real issue with this pair is general risk trends. Looking forward, the swells in sentiment are difficult to forecast, but central bank commentary (from all central banks, since the financial crisis is clearly a global one at this point) and rate decisions could have a profound impact on the balance between risk/reward in the market. Notably, tomorrow, the ECB is expected to announce policy decision. This could inadvertently affect the yen as the European authority is considered one of the few that sees the ability to hold rates relatively high - standing as a sign of confidence that conditions will prove relatively soon. Should the central bank deliver a hearty rate cut and produce dovish commentary, it will dampen any lingering optimism in the market and may very well tip risk aversion into its next trend.