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We maintain the bearish CAD standpoint in the medium-term, expressed as a one-touch calendar call spread. In particular, we have reservations about the smoothness of the USMCA ratification process, which is starting to show some signs of life in DC and is largely tracking our timeline and base case for now. Shorter-term drivers were in focus this week for CAD, though.
In particular, Canadian Q4 GDP disappointed across the board versus expectations (0.4% vs 1.0%), whereas US GDP outperformed (2.6% vs 2.2%), and is the lowest quarterly growth rate since 2016. Given the importance of the m/m figure (-0.1%) in BoC policy-making, this is likely to reinforce the wait-and-see pause for some time, even with the acknowledgment that the policy rate remains 75bps below the neutral range.
Meanwhile, CAD may yet come under pressure as political risk mounts surround PM Trudeau in the SNC scandal.
In addition to serious allegations against the PM and calls for him to resign, Canada is set to hold federal elections later this year.
3M ATM IVs are trending a shy above 6.26% - 6.58%, skews are also suggesting the odds on OTM call strikes up to 1.36 levels at this juncture. We could also notice bullish neutral risk reversals that signal upside risks in the risk-neutral distribution of returns. Also, the IV curve is at, or slightly decreasing, with maturity.
Favor optionality to directional trades. We are inclined to position for a directional call spreads, as calling the bottom is quite difficult and adding naked spot exposure is risky at the moment.
The call spreads are preferred option structures given elevated skew and favorable cost reduction.
Hence, activated a -3m/+7m OT USDCAD calendar call spread (k=1.40). Paid 16.6% in January. Marked at 18.27%. Courtesy: Sentrix & JPM
Currency Strength Index: FxWirePro's hourly USD spot index is flashing at -25 (which is mildly bearish), CAD is at 146 (highly bullish) while articulating at (14:08 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
