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Following rate cuts amounting to a total of 150bp in March (from 1.75% to 0.25%) and numerous other measures to ease refinancing for the banking and economic system the Bank of Canada (BoC) is likely to keep its key rate on hold today. It might however agree on further expansionary measures. Canada too is hard hit by the corona crisis. More than 5.6m applications for employment insurance and income support have already been received by the government, which has initiated major programmes to support the economy. The crisis came at a bad moment, as the economy had already lost momentum ahead of the major Covid-19 uncertainty, as the BoC’s latest business outlook survey illustrates. The labour market report for March published last week was already disastrous but things are likely to get really bad in early May when the report for April is due for publication.
Moreover consumer sentiment remains in free fall. Sufficient reason therefore to decide on further expansionary measures (such as additional asset purchases, forward guidance etc.), even if similar to the Fed the BoC will try and avoid negative interest rates and will therefore not cut its key rate further. The BoC will keep a particularly watchful eye on the housing market, as it is emerging that consumers are not just getting increasingly uncertain about their future job and financial situation but also as far as housing prices are concerned.
A crisis on the property market would lead to a further deterioration of the economic situation. The CAD is benefitting from the slightly improved sentiment on the financial market, but in view of the pronounced downturn of the economy we nonetheless urge caution.
Hence, at this juncture (when USDCAD spot reference: 1.4028 levels), we upheld our previous strategy for USDCAD on hedging grounds via 3-month (1.3815/1.45) debit call spread.
For CADJPY, we advocated options strips strategy to address any abrupt upswings in short-run and the major downtrend.
We’ve been firm to hold on to this strategy on both trading as well as hedging grounds, unlike spreads, combinations allow adding both calls and puts at a time in our strategy.
Buy 2 lots of 3m at the money delta put option and simultaneously, buy at the money delta call options of 1m tenor. Courtesy: Commerzbank
