This write up emphasizes long positions in commodity driven currencies such as NOK and shorts in CAD, we continue to indicate a surprising degree of equanimity in CAD towards Trump and the Boc and anxiety in NOK towards less obvious risk factors. In particular, CAD now screens 1% rich versus USD on short-term models; whereas NOK is around 2% cheap against EUR (albeit this risk premium has tightened from over 3% at the start of the year).

This relative mispricing doesn’t seem particularly rational, and as such, we remain positioned short CAD and long NOK, both against their respective regional anchors and paired against one another. The NOK position has tracked quite well this week, whereas CAD pessimists were challenged by one of president Trump's first executive orders to authorize the Keystone XL pipeline.

This was a long-standing objective of Trump and as such shouldn’t have had the positive effect on CAD that it did, other than for the fact that it signals a more co-operative approach by the new administration towards US-Canada relationships. Be that as it may, we believe CAD remains vulnerable to collateral damage from NAFTA renegotiation and any decision on border adjustment taxes (CAD and the not so surprising Keystone XL announcement.

Hedging Frameworks:

USDCAD:

Strategy: 3-Way diagonal straddle versus OTM put
Spread ratio: (Long 1: Long 1: Short 1)

Go long in 1M at the money -0.49 delta put, and go long 2M at the money +0.51 delta call and simultaneously, Short 2W (1%) out of the money put.

CADNOK:

Short CADNOK at 6.3025 in mid-month futures with a stop at 6.5581, the short futures position is the unlimited returns, unlimited risk position that can be entered by the futures speculator to profit and a hedger could safeguard FX exposures from a fall in the price of the underlying spot FX.

EURNOK:

Stay short in EURNOK at spot ref: 8.8850 via 2m ATM -0.49 delta puts.