Sentiment Driven JPY | Oil, USD, CAD Forex Analysis

Mr. Japanese Yen has been gaining popularity among Asian investors and no matter what negative news comes out of Japan, Mr.Yen seems to remain popular. Kinda like Donald Trump, won’t you say?! According to the Donald, even if he “shoots someone in the crowd, his supporters will remain loyal.”

As I mentioned last week, the markets (especially JPY and GBP) seem to have become a incredibly sentiment driven, which means Fundamental Data doesn’t really impact the market participants unless it is in their favor. Therefore, five points of Invest Diva Diamond are not pointing to the same direction in most currency pairs. So what’s an Invest Diva to do?

Let’s take a deep dive and see if we can create a solid strategy, or if we should hold off on forex and turn to other investments instead for the time being.

1- Oil on its way to recovery?

This just in! Saudi Arabia, Qatar, Russia and Venezuela on Tuesday agreed to freeze oil production at January levels if other oil-producing countries did the same.

Furthermore, in their Annual Outlook for Energy Report, Exxon (XOM) foresees global energy demand (all fuel types, not just oil) rising 25% by 2040. Exxon’s conclusions are broadly similar to other majors like BP and Shell.

So, there you have it: lower supply and higher demand which could put an end to the falling WTI prices. Bad news for local drivers who don’t own an electric car, but certainly good news for the Canadian dollar.

2- Canadian Dollar in a Tough Position

For my up-and-coming Invest Divas, let me explain that the Canadian dollar (also known as Ms. Loonie, CAD) is impacted massively by oil prices because of its positive correlation to it. A large part of Canada’s US dollar income comes from the sale of energy-based goods to the rest of the world and to the USA in particular.

So if you are keeping score, rising oil prices would give the loonie a +1. Counting the blessings, economic activity in Canada picked up by 0.6% in Q3 2015 after falling into a mild recession in Q2 2015. Rising oil prices could boost up the depressing employment numbers in the coming months, and so far, monthly GDP numbers also show improvements in Canadian economy.

But will Canada’s GDP continue to grow? So far, the Bank of Canada (BOC) doesn’t think so. Looking at the inflation, though the annual inflation rate was boosted by the higher value of imported in December, the other inflation components aren’t as upbeat.

All in all, the return of oil could help Canada’s economy to some extent, and Canada’s trading sector could provide some support for the Loonie and optimism for the BOC.

3- Japanese Yen Remains in Power

The Samurai spirit has made a comeback! Bank of Japan (BOJ) tried negative interest rate policy beginning of February which held Mr. Yen  down for one day. He might have been listening to Katy Perry’s “Roar” because he got up, brushed the dust, and has been singing:

I got the eye of the tiger, a fighter, dancing through the fire
‘Cause I am a champion and you’re gonna hear me roar!

We certainly have heard the roar. Even the worse-than-expected industrial production Monday night couldn’t bring him down… It actually made him stronger!

Remember, they don’t like strong JPY back in Japan because it lowers their export profit. All your favorite Japanese products like Toyota, Sony, and Wii can now be bought for a cheaper price and therefore those companies earnings slow down.

With this, BOJ might attempt another trick to make the Japanese Yen weaker. We could see a Quantitative Easing (QE) which could create another temporary solution for the ever strengthening JPY.

4- US Dollar on Temporary Pullback

While the US economy has been showing solid and strong domestic growth when you look at the labor market consumer spending, we’ve had a couple of setbacks as we entered 2016. PMI readings are indicating that exports declined further in January, and headline CPI for the December period was kicked into the red. However these negative numbers could have merely been an after-effect of low oil prices, because underlying or core reading seems to be healthy enough.

The shrinking unemployment and raising consumer spending by themselves are already good news for Q1 2016 GDP since consumer spending has been the main driver of US GDP growth.

However, things look a bit more grim for overseas trade since PMI readings are indicating that exports declined further in January. And while inflation for the December period was pretty bad on the surface because of the lower oil prices, the underlying or core reading seems to be healthy enough.

With this the renewed oil forecast, we could see an end to dovish tones of Fed officials. We still need to wait for the upcoming marketing moving gossips out of the US, like the FOMC meeting minutes on Wednesday, Unemployment Claims on Thursday and Inflation reports on Friday.

 5- Technically Speaking

Now that we’ve crushed the fundamentals, let’s see what the technicals have to say.

– USD/JPY Breaks Below Major Supports

When Mr. Yen is in power,there is no way but down for the JPY crosses which are led by other currencies such as USD/JPY and GBP/JPY.

Remember, when a currency is quoted second in a currency pair, its strength has a negative effect.

Related Video: Why US Dollar Comes SECOND in EUR/USD?

So far, the USD/JPY pair has broken below major supports at 116 and 113. If the US economic data comes out in the red this week with further dovish tone from the FOMD, we could see further drops towards next support at 110.

On the other hand if the BOJ decides to intervene, we could see a spike back to the resistance at 121.50. This scenario would become stronger on positive economic data from the US.

Here are the important levels to keep in minds for USD/.JPY. Don’t forget that these support and resistance levels may not not suitable for all traders. Profitability largely depend on your account size, margin and leverage. In our one-on-one coaching classes, I show you how to  personalize your account based on our trading guidance

– USD/CAD Held by 50% Fibonacci 

This one seems to be in a tougher position as it just entered the ichimoku cloud and seems to be held by a strong support at 1.37, which falls on 50% Fibonacci retracement.

Now that the oil prices could be on a rise, the only thing that could pull the USD/CAD pair up is a comeback of Ms. USA. I have mentioned in my previous review of USD/CAD that the pair still have room to move higher on a very long term point of view, with the resistance sitting at 150.

So the battle is now between Ms. USA and Mr. Loonie. Which one can get stronger faster to rescue the pair from the Ichimoku cloud?

Here are some points to consider when it comes to this pair.

In any case, set your stop loss and profit targets a little loose from the levels I have mentioned to avoid getting kicked out of your trading position prematurely. 

I’ll analyze other currencies including British Pound (GBP), Euro (EUR), Swiss Franc (CHF), etc. during our private session this week.