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Bullish/Bearish Scenarios, OTC Indications and Hedging Perspective of EUR/CAD

Bearish EURCAD Scenarios: 

1) Euro area growth fails to rebound much above 1% and the ECB softens the guidance for rate hike towards the end of 2019 or indeed even 2020, 

2) The extended political protests in France followed by a populist tide at the European parliamentary elections in May, 

3) The US imposes Section 232 tariffs on European car imports.

4) USMCA ratified ahead of schedule; 

5) BoC signals a more aggressive path of rate hikes;

Bullish EURCAD Scenarios: 

1) Fed ends the hiking cycle but with European growth back at .5-2.0% (so more 2006 than 2000; 

2) The continued strong CB demand for EUR. 

3) Baseline expectations shift towards NAFTA withdrawal which is negative for CAD; 

4) Canadian growth slowdown extends vis-à-vis US; 

5) Local/global crude oil prices weaken further

EURCAD OTC outlook: Despite the BoC event, the implied volatilities of this pair have been on the lower side, ranging between 6.89% - 6.94% 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 1.5644 to the current 1.5002 level of-late but spiked previously from the lows of 1.4754 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: 1.5002, contemplating above driving forces and OTC indications, we reshuffle 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: JPM & Sentrix

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 32 (which is mildly bullish), while hourly CAD spot index was at -14 (mildly bearish) at 06:06 GMT.

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

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