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Ahead of BoC’s monetary policy that is scheduled for this week, USDCAD uptrend remains intact, simultaneously, short-term trend signals intensified selling pressures as the current price slid below 21-DMA levels. Canadian central bank most likely to stay status quo. They raised its benchmark interest rate by 25bps in its October meeting to 1.75 percent 1.5 percent, as widely anticipated. It marks the 3rdincrease this year and the highest rate since December 2008.
Technically, USDCAD is little changed into the end of the week excepting that the divergence with the slow stochastic oscillator noted earlier this week is starting to correct and is perhaps becoming less of a negative risk for the USD. The weekly uptrend in USDCAD remains strong and trend momentum oscillators are moving further in the USD’s favour. However, we note that short-term price action through the latter part of the week shows a strong rejection of levels to or near 1.3350.
OTC indications and options strategies:
1M ATM IVs are trading a shy above 6.61% - 6.99%, skews are also suggesting the odds on OTM call strikes upto 1.34 levels at this juncture. We could also notice fresh bids for 1M risk reversals that signals upside risks in the risk-neutral distribution of returns. Also, the IV curve is at, or slightly decreasing, with maturity.
Favour 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.
Thus, call spreads are preferred option structures given elevated skew and favourable cost reduction.
At spot reference: 1.3174 levels, contemplating prevailing bearish sentiments in the short-run and long-term major uptrend, we execute USDCAD 1m/1w call spread with strikes of 1.3060/1.35 for a net debit.
Maintain the net delta of the position above 40% and shorting the upper leg call (OTM strikes) likely to reduce the cost of the ITM call by almost close to 20-25%.
Maximum gain is achievable when underlying spot FX move above OTM strike with ideal risk-reward.
By shorting the out-of-the-money call, the options trader finances the cost of establishing the bullish position but forgoes the chance of making a large profit in the event that the underlying asset price skyrockets. Source: Sentrix, saxobank
Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at 10 levels (which is mildly bullish), hourly USD spot index was at -114 (highly bearish) while articulating at (09:46 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
