The CADJPY has recently set fresh 14-year highs, rallying past a triple top at the 114.00 mark and the 105.02 high set on December 5th, 2005. Given that these are historically extreme price levels, one has to look back almost two decades to find meaningful resistance zones for the currency pair. The chart above shows monthly price action in the CADJPY from 1989 to present. The horizontal lines represent the Fibonacci retracement ratios from the currencys 57% decline from the end of 1989 to mid 1995. Notice how in early 1998, CADJPY challenged the 50% retracement of its decline at 97.53 but failed to break. Ensuing price action saw the pair below 70 before any material rally. The level has served as formidable resistance and more recently support with several tests in 2005 and 2006. Given CADJPY recent appreciation, it now remains a mere 100 points below this historic price point, which begs the question: can this currency pair continue its torrid pace?
This 15-year weekly chart gives us a more granular look at the price action that has led the CADJPY to multi-decade highs. A simple 40-week moving average shows that it has definitively held its pronounced uptrend despite more sideways trading in recent months. Given the significance of the 40-week SMA, it looks to provide formidable support in the case of any significant decline.
The daily chart gives us an interesting look at just how much the multi-year uptrend has slowed as compared to its previous rate of ascent. If we take a look at the RSI plot, we notice that price remains just a tick below the 70 overbought figure. In and of itself, this provides advance signal of any future decline. Of course, we must remember that oscillators work best in range-bound conditions, and we could easily see RSI at overbought values for extended periods of time in the case of an uptrend. More importantly, however, we notice that there exists a material bearish divergence between the recent high and the high in December of 2005. When price reached its previous 14-year high, RSI reached a value of 84. In the recent break above the 2005 peak, however, has only reached 70. This signals that bulls are potentially losing steam as compared with previous years, and provides a bearish signal for the CADJPY pair.
Taking an even closer look at the overall price action in the CADJPY, we see that the currency cross will likely range trade in the coming days on a narrowing Bollinger band width. Previously steep ascents or downturns come with the force of high volatility, but retracements have also often occurred when volatility dries up. Using Bollinger Band Width as a proxy for overall realized volatility, we see that it reached a peak and subsequently turned lower. This could mean that we should either expect some sideways trade in the near term, or a slower retrace to support. The x-factor in this case could very well be one of the primary sources of strength and weakness for the CADJPY cross: the price of oil.
After setting all-time highs in July, oil has recently retraced to its lowest levels since June. It clearly remains within the bounds of its overall price channel, and a recent test of a multi-month support line resulted in a bounce in the commodity. If we again take a look at Relative Strength Index, however, we notice another bearish divergence in price relative to its oscillating indicator. In fact, Oil set new all-time highs in July, but the weekly RSI was still considerably lower than the level seen in its previous peak. A drop in oil could produce just the drop that CADJPY may make if it fails to break the significant 61.8% retracement of its multi-decade downtrend.
Conversely, a sustained monthly break of the 106.81 ceiling could effectively spell an end to the CADJPYs longer-term trend. Of course, we would have to see it close above on the monthly bar for confirmation, as any smaller a time frame could provide a false signal of future strength.
