FxWirePro: EUR/CAD Bullish/Bearish Scenarios for Q1’2019 - OTC Updates and Options Hedging Strategy Ahead of BoC

Canadian central bank is scheduled on January 09th, for BoC to be repriced by a hike as a partial catch up to the Fed’s level and pace, and for some momentary positive risk premium assisted by a covering of shorts. 

Despite the legislative hurdles remaining after NAFTA transforming to successful USMCA (and thus precluding a true best-case scenario for now), all of the above factors appear to be shifting in a direction that supports CAD strength over the coming months.

On the flips side, a probable improvement in rate spreads in the euro’s favour as the ECB delivers rather more tightening than the curve prices. We continue to believe that delivery of early stage ECB tightening should be more impactful for FX. 

Moreover, Italian stress to the fore and the dollar was buoyed by the re-think of Fed policy. Over the past few months the euro has turned higher once again as equities have slumped as this has caused a de-risking of the (small) short EUR positions the spec market had established over Italy.

EURCAD has spiked from the lows of 1.4754 to the current 1.5518 levels in last couple of months. 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.

EURCAD OTC outlook: Implied volatilities of this pair have been on the lower side, ranging between 7.96% - 7.98% in 2m tenors. Please be noted that the IV skews of this tenor have been balanced on either side that signifies the underlying spot moves could be seesaw over next Q1'2019. The prevailing bullish sentiment of the underlying movement with lower IVs is interpreted as conducive environment for writing overpriced OTM puts. Using three-leg strategy would be a smart move to reduce hedging cost.

Options Strategy: Contemplating above driving forces and OTC indications, we advocate initiating longs in 2M 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 puts. Thereby, we favor slightly on upside risks as short leg likely to reduce long legs.

Currency Strength Index:FxWirePro's hourly EUR spot index is flashing at -31 (which is mildly bearish), while hourly CAD spot index was at -30 (bearish) at 10:52 GMT.

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