FxWirePro: Loonie Gets Breathing Space BoC And Labour Market – Uphold Directional Hedges

The loonie can breathe a little sigh of relief and with it the Bank of Canada (BoC). The labour market report for December partially made up for the disastrous result of the November one. In November 38k full time positions were lost, including part time positions this totalled a whopping 71k causing the unemployment rate to jump to 5.9%.

However, 35k new jobs were created in December with the unemployment rate falling to 5.6%. Combined with a weaker than expected US labour market report the result supported the loonie on Friday afternoon.

The BoC will also welcome the result, as inflation is on target and does therefore not constitute an issue for the BoC; but out of concern for the possible negative effects of the trade conflict between the US and China the central bank is keeping a close eye on the development of the economic data. If we were to see any deterioration here the BoC could quickly abandon its neutral approach and take a dovish approach instead. If the situation on the labour market had not improved again slightly in December that would have no doubt been the first tick on the list in favour of a more dovish approach.

In particular as the PMI eased again slightly in December, but thankfully remains above 50. The economic data at the start of the year is not concerning but is no doubt going to confirm the BoC in its view that it will maintain its cautiously neutral approach and will keep a close eye on economic developments so that it can act quickly, should this become necessary.

The USD is still liable to close out the week with a net gain versus the CAD but the risk of a significant squeeze higher looks less likely now we believe and we still rather think USD gains are a fade.

At spot reference: 1.3052 levels (while articulating), we recommend directional hedges that comprised of longs in EURUSD futures contracts of January’20 delivery, simultaneously, shorts in futures of March’20 delivery for arresting bearish risks in the major trend. The short leg is likely to hedge potential slumps and the momentary upside risks can be arrested by the long leg. Thereby, one could be able to directionally position in their FX exposures on hedging grounds. 

Considering above underlying factors, we advocate 1% in the money put options of 2m tenors that seems to be the best suitable on hedging as well as trading grounds. Courtesy: Commerzbank