FxWirePro: Italian risk for EUR and USMCA for CAD - Bid 2m EUR/CAD skews and deploy 3-way straddles ahead of ECB and BoC

ECB and BoC’s monetary policy announcements have been the major data events for today and tomorrow.

For BoC to be repriced by a hike as a partial catch up to the Fed’s level and pace, and for some temporary positive risk premium helped 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 24 hours 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 slid from the peaks of 1.6153 to the current 1.5033 levels in last couple of months. Further material downside from the current levels will likely only come on a gradual basis as USMCA ratification steps are achieved and as Canadian cyclical upside from the “peace dividend” becomes gradually apparent justifying a more BoC hikes than currently priced. BoC monetary policy is also scheduled for this month (precisely on 24thOctober), rate hikes more imminent. While ECB’s monetary policy is scheduled on this Thursday, we continue to believe that delivery of early stage ECB tightening should be more impactful for FX than an extension of late-cycle Fed hikes as the market is liable to become more concerned about the longevity of the US cycle if the Fed is confronted with rather more inflation and less growth than this year. 

EURCAD OTC outlook: Implied volatilities of this pair have been on the lower side, well below 7.5%.

Please be noted that the 2m IV skews have been balanced on either side, but signify more hedgers’ interests on OTM put strikes. Amid this bearish sentiment with lower IVs are interpreted as conducive environment for writing overpriced OTM calls. 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 calls. Thereby, we favor slightly on downside risks as short leg likely to reduce long legs.

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at -44 (which is bearish), while hourly CAD spot index was at 133 (bullish) at 07:56 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex