FxWirePro: CAD/JPY Options Strips Ahead of Canadian Data Announcements and BoC Monetary Policy

The CAD is quietly consolidating within an incredibly tight range and trading just below last week’s 2019 high. Fundamentals remain supportive and the CAD continues to trade well below our estimated equilibrium based on interest rate differentials and oil prices. Near-term domestic risk is limited to today’s housing starts and building permits ahead of Wednesday’s BoC policy decision (widely anticipated hold) and MPR forecast update. 

Canadian housing starts and building permits are lined up for the announcement. Canadian municipalities issued a record CAD 9.3 billion worth of building permits in April 2019, up 14.7 percent from the previous month while markets had expected a smaller 1.3 percent rise. The CAD 1.2 billion increase in the value of permits was the largest since May 2007, with British Columbia accounting for most of the gain, due to permits being issued ahead of the development cost increase in Metro Vancouver in May, the first change in costs in that region since 1997. Meanwhile, Quebec reported the largest decline, down CAD 147 million from March.

Recent domestic releases have confirmed the BoC’s expectations for a recovery following the Q4/Q1 soft patch. Messaging on the ‘degree of accommodation’ is likely to remain unchanged as a result of global trade policy uncertainty, however. We remain bullish CAD and look to continued strength in the minor trend as well.

However, today’s data announcement comes ahead of next week’s Bank of Canada meeting. Rates are expected to remain unchanged, so Governor Poloz’s update and forward guidance will be key.

OTC Updates and Options Strategy: 

The positively skewed CADJPY IVs of 3m tenors have still been signaling bearish risks, the hedgers’ interests to bids for OTM put strikes up to 80.500 levels indicating downside risks in the medium terms (refer above chart). Please also observe the above technical chart for the major downtrend. 

Accordingly, we advocated options strips strategy to address any abrupt upswings in short-run and the major downtrend.

We’ve been firm to hold on to 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 3m at the money delta put option and simultaneously, buy at the money delta call options of similar tenors. It involves buying a number of ATM call and double the number of puts. Please be noted that the option strip is more of a customized version of options combination and more bearish 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 a downward move. Hence, any hedger or trader who believes the underlying currency is more likely to spike upwards in short run but major downtrend can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid. Courtesy: Sentrix