FxWirePro: USD/CAD calendar call spread on monetary and geopolitical risk events

CAD has been quietly consolidating around 200 day MA; bullish on spreads, relative CB policy and trading within a relatively tight range just below Monday’s three week high. The near-term domestic risk is limited to the release of Canada’s current account figures for Q3, ahead of Friday’s highly anticipated GDP data. The market tone continues to dominate as a critical near-term driver for the CAD however we’ve also noted a material recovery in CAD/spread correlations, suggesting a renewed focus on the outlook for relative central bank policy. Yield spreads have narrowed in response to the recent fade in Fed expectations and we continue to feel that markets are underpricing the risk of BoC tightening in the second half of 2019. 

BoC risk is elevated into next Wednesday’s policy decision, Thursday’s economic progress report from BoC DG Patterson and the March 14 speech from SDG Wilkins.

We remain comfortable with our medium-term play on long USDCAD via a one-touch calendar call-spread as an expression of political tension still to come. 

The USMCA ratification process is starting to pick up steam in the US, and while still under the radar, is starting to show signs of pressure that we’ve been anticipating. 

While it’s still too early to manifest in broader markets, we believe our timeline for mid- to late-year political stress (and subsequent FX pass-through) remains on track. BoC Governor Poloz’s speech highlighted that USMCA ratification remains an uncertainty, though its hiking bias remains intact for now; we assume that if peak stress does occur, that this could be put on hold until USMCA is resolved in late-2019. 

Activated longs in a -3m/+7m OT USDCAD calendar call spread. Paid 16.6% in mid-January. Marked at 17.15%. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -24 levels (which is mildly bearish), hourly CAD is at 115 (bullish) while articulating (at 12:43 GMT). 

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