We have been bullish the USD/JPY in recent articles and we are also bullish all other majors v the JPY and one of the most attractive pairs in our view is CAD/JPY. Our view on the fundamentals sentiment and technical levels to watch out for are below.

“The Bank of Japan will adopt a more cautious approach to hiking interest rates to avoid rapid appreciation in the yen after the recent global market turmoil.”(Fitch Solutions’ BMI) “We expect that the BoJ will take a more cautious approach and only hike by 25bps this year to 0.50% and they don't expect this until the end of the year. 

The Bank of Japan has made it clear that it's in no hurry to hike rates and a higher Yen - “As a result of the correction of the yen's depreciation, the upside risk to prices arising from higher import prices has decreased.” (Shunichi Uchida Bank of Japan)

We presently have an interest rate of just 0.25% and all other major currencies offer a higher yield the Canadian interest rate is 4.5% so an attractive interest rate differential.

Another reason to be bullish on the CAD is the USD is oversold on interest rate differentials and if it mounts a broad-based rally (which we expect) the CAD is the most correlated currency with USD strength/weakness so will firm with the USD.

Most of the big rally in the JPY was driven by the liquidation of short carry trades against the JPY these have now been cleaned out the market, the JPY is overbought and is an attractive sell

Sentiment

If we look at positioning in the USD/JPY and USD/CAD we can work out what speculators are doing in the cross.

In terms of the COT Net Traders positions in USD/JPY we have seen the big speculative position taken out on stop with both large speculators and commercials near the zero line:

In terms of USD/CAD we can see on the chart below a big net long position held by smart money commercials and a big short position held by large speculators.

In terms of the cross, we get the following which we will express as simple ratios of longs v shorts: Large speculators are holding 8 to 1 in terms of short CAD positions over longs and commercial hedgers hold 2 to 1 in terms of longs over shorts which on our spreadsheet gives us a divergence of 10 to 1 which has built up quickly. Any divergence above 10 in our view is worth considering and going with smart money commercials.

In terms of the CAD, it's oversold and we expect more upside we also have an attractive carry interest in favor of longs, the technicals give us a low risk high potential reward entry...

Technical Analysis

Our view of the key levels of support and resistance to look out for below.