Technical view: CAD/JPY’s rally is lagging…are we seeing a reversal?

Outside of the US dollar, the Canadian dollar has been the strongest major currency year-to-date, with the loonie benefitting from aggressive interest rate increases by the Bank of Canada and strength in the price of oil, Canada’s most important export. On the other side of the coin, the Japanese yen has been by far the weakest of the major currencies so far in 2022 as the BOJ stubbornly protects the yield cap on JGBs in an effort to stimulate inflation in the moribund island economy.

These fundamental trends show no imminent signs of reversing, but CAD/JPY’s chart nonetheless suggests that there may be an opportunity for one or both of these currencies to reverse some of this year’s moves.

As the chart below shows, CAD/JPY has rallied a staggering 1700+ pips since early March, and the pair closed above its 50-day exponential moving average (EMA) every single day over that four-month period. That said, the upside momentum has stalled over the last seven weeks, with rates generally consolidating around the 105.00 handle since then. Last week, bulls sought to push the unit to fresh 14-year highs above 107.25 but were unable to maintain the gains, creating a potential “failed breakout” at that level:

Source: StoneX, TradingView

Looking at the pair’s 14-day RSI beneath the chart, the indicator has formed a rare quadruple bearish divergence with price. For the uninitiated, a bearish divergence is formed when price makes a higher high but a momentum indicator makes a lower high; this setup shows waning buying pressure on each foray to new highs and is often seen as a precursor of a significant reversal once the trend breaks.

Moving forward, readers should monitor the bullish trend line connecting the lows over the last six weeks (currently around 105.30) as well as the 50-day EMA (104.25) for breakdowns to signal that the momentum is finally shifting in favor of the bears. A confirmed break through these levels could open the door for a retracement toward 100.00 or even the April/May lows at 98.25 next.

Meanwhile, CAD/JPY bulls should exercise caution unless the pair can break conclusively above resistance in the mid-107.00s in the coming days.

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