CAD/JPY continues to consolidate, FxWirePro continues ‘diagonal option straps’ – Directional strategy best suitable ahead of BoC

CADJPY bounce back past 82.300 levels, extending 3rd week highs ahead of lingering hopes of 25 bps hikes from the scheduled Bank of Canada monetary policy. The major trend of this pair has been in consolidation phase since November’2016 and it seems to be continued for now (refer above technical chart).

The monetary policy is scheduled on 09thJan 2019. Few investors have also slashed odds of future rate hikes after the central bank noted that “there may be additional room for non-inflationary growth”. However, the outlook for relative central bank policy is offering support as Bank of Canada rate expectations stabilize while those for the Fed continue to soften. 

While the yield spreads have narrowed however oil prices regained with WTI breaking back above $50/bbl mark. 

But on the flip side, the measures of implied CAD volatility are climbing and the cost of protection against CAD weakness is at fresh highs. The one-yearrisk reversal is at levels last seen in June 2017. A reminder that CAD seasonals typically run bearish into the end of January.

Options Trading Strategy (CADJPY): Contemplating all above factors, although it is sensed that all chances of CAD may look superior over Japanese Yen in the near-term future; we advise balanced-hedging perspective but to favor slightly CAD’s appreciation in near-terms through below recommendations.

We’ve been firm to hold on this strategy on both trading as well as hedging grounds, unlike spreads, combinations allow adding both calls and puts at a time in our strategy.

Buy 2 lots of 1m at the money delta call option and simultaneously, buy at the money put options of 3m tenors. It involves buying a number of ATM puts and double the number of calls. Please be noted that the option strap is more of customized version of options combination and more bullish version of the common straddle. 

Huge profits achievable with this strategy when the underlying currency exchange rate makes a strong move on either downwards or upwards at expiration, but greater gains to be made with an upward move. Hence, any hedger or trader who believes the underlying currency is more likely to spike upwards can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid.

Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at 130 levels (which is bullish), hourly JPY spot index was at -56 (bearish) while articulating at (07:37 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex