FxWirePro: Key Driving Forces of USD/CAD Bullish/Bearish Scenarios, OTC Indications and Options Strategies

Bullish USDCAD scenarios above 1.35, given: 

1) Legislative hurdles arise in USMCA ratification process; 

2) Canadian growth slowdown extends vis-à-vis US; 

3) Local oil prices weaken further

Bearish USDCAD scenarios below 1.30, given: 

1) BoC signals a more aggressive path of rate hikes; 

2) A broad US dollar discount returns because of political risks; 

3) USMCA ratified early

Well, we have revised our CAD forecasts weaker in light of a more hostile trade policy environment, which may last through US mid-terms, and some supply- bottleneck renewed downside risk in crude prices. We expect USDCAD now to remain at 1.3375 by end of Q4, the high end of the range seen recently.

OTC indications and options strategies: 

1M ATM IVs are trading a shy above 7.4%-7.8%, skews are also suggesting the odds on OTM call strikes upto 1.3550 levels at this juncture. 1M risk reversals signalling a sharp upside risks in the risk-neutral distribution of returns. Also, the IV curve is at, or slightly decreasing, with maturity.

Favour optionality to directional trades. We are inclined to position for a directional call spreads, as calling the bottom is quite difficult and adding naked spot exposure is risky at the moment. 

Thus, call spreads are preferred option structures given elevated skew and favourable cost reduction.

At spot reference: 1.3290 levels, we execute USDCAD 1m call spread with strikes of 1.3060/1.35 for a net debit. 

Maintain the net delta of the position above 40% and shorting the upper leg call (OTM strikes) likely to reduce the cost of the ITM call by almost close to 20-25%.

Maximum gain is achievable when underlying spot FX move above OTM strike with ideal risk-reward.

By shorting the out-of-the-money call, the options trader finances the cost of establishing the bullish position but forgoes the chance of making a large profit in the event that the underlying asset price skyrockets. Source: Sentrix, saxobank

Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at -85 levels (which is bearish), hourly USD spot index was at -23 (mildly bearish) while articulating at (07:52 GMT). 

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