FxWirePro: EUR/CAD 3m skews favour both bulls and bears – Deploy 3-way straddles ahead of monetary policy season

Bullish CAD & EUR into this week’s BoC & ECB’s monetary policies (on Wednesday and Thursday respectively). While EUR fundamentals are constructive into ECB; bullish targeting 1.16 levels.

Both BoC and ECB meetings should deliver a constructive message with a focus renewed focus on policy normalization.

EURCAD OTC outlook: Despite the BoC event, the implied volatilities of this pair have been on the lower side, ranging between 6.77% - 6.84% in 3m tenors. Please be noted that the IV skews of this tenor have been balanced on either side. The positively skewed IVs are stretched on both OTM calls and OTM put options, the underlying movement with lower IVs is interpreted as a conducive environment for writing overpriced OTM calls. Using the three-leg strategy would be a smart move to reduce hedging cost.

EURCAD has dipped from 1.5126 to the current 1.5102 level but spiked previously from the lows of 1.4876 to the peaks of 1.5640 levels. Further material upside risks from the current levels will likely only come on a gradual basis given the BoC’s dovish rhetoric sees in upcoming monetary policy.

The Execution of Options Strategy: At spot reference: 1.5102, contemplating all the above driving forces and OTC indications, we uphold our previous strategy by advocating initiating longs in 3M EURCAD at the money -0.49 delta put, and go long in at the money +0.51 delta call of similar expiry and simultaneously, short 2w (1%) out of the money calls. Thereby, we favor slightly on upside risks as short leg likely to reduce long legs. Courtesy: Sentrix

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 42 (which is bullish), while hourly CAD spot index was at -82 (bearish) at 05:33 GMT.

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