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CAD forecasts are upgraded on removing a NAFTA-scare discount in 1Q and forecasting more strength by end-18 on higher oil prices and a wider dollar discount. On the flip side, a high conviction, constructive view for EUR predicated on the robust cyclical lift in the region and the unwinding of distortions to capital flows and EUR valuation from the unconventional monetary policy.
Hence, EURCAD appreciation appears to be likely but a little sluggish than it has recently been as the CAD likely to get cushion on crude price support, while large options set to constrict the range and the skew is still undecided whether volatility should rise on the back of a higher or lower spot (refer above nutshell evidencing positive IV skews stretched towards OTM calls and put for strikes upto 1.63 and 1.54 respectively but with lower IVs a tad below 8.3%).
There is also a case to be made for the long leg to be comprised of a mix of EURUSD and a petro-sensitive EUR-cross such as EURCAD to strip out the oil price sensitivity of the structure.
EURCAD vols also have the advantage of very little risk premium priced into them having reversed more than 100% of their VIX-spike gains per above chart, and can also potentially benefit from idiosyncratic NAFTA-related stress.
Contemplating above factors, we had already initiated below-mentioned option structures, for now, we continue to hold on to the same positions.
An equally weighted basket of 6M EURUSD and EURCAD straddles (€85K vega each) vs. selling €100K vega of 6M 30D EUR calls/RUB puts.
The RV is better expressed in longer expiries (6M – 1Y) than in short dates since the implied –realized premium in RUB widens as one goes further out the curve, and also because the belly of the curve is the best value sector of the EURUSD surface to buy.
Currency Strength Index: FxWirePro's hourly EUR spot index has shown -65 (which is bearish), while hourly CAD is at -13 (which is neutral) and USD spot index was at 90 (bullish) while articulating at 12:07 GMT. For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex.
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