One of the best trade setups is a a drop in volatility and looking to trade a breakout from a tight range and this scenario is present in CAD/JPY...

We are bearish on the JPY against all major currencies and the reason for this is its low yield – for more info on our bearish JPY stance check out our article from earlier today 

In terms of CAD/JPY, we have seen a big sell-off and a small counter-trend rally and we are now trading sideways in low volatility with clearly defined support and resistance which can be seen on the chart at the end of this article.

A breakout from the range is expected to favor more USD Strength. The reason we favor an upside breakout is due to speculative positioning.

Sentiment

In terms of getting the speculative positioning in the cross, we will look at speculative positioning in the two majors USD/JPY, and USD/CAD which make up the cross. The data below is from the COT Net Traders Positions from the CFTC which show the actual real money positions of several groups on the CME trading exchange:

Upside Breakout to Follow on to Upside 

Speculators are heavily short of the CAD/JPY while “smart money” commercial hedgers are heavily long. If we break resistance we expect a move up in volatility as these short speculative positions get taken out on stop.

Technical Analysis

The key levels of support and resistance to look out for are below.