FxWirePro: Loonie Outperformance & Underperformance – CAD Trade Ideas

CAD outperformed a weak dollar, but underperformed most other G10 peers. USDCAD declined 2.8% since our last Key Currency Views, but this was largely reflective of a generally weak dollar. Versus most other G10 peers, CAD underperformed this past month, particularly vs NOK and SEK (both by around 3%). This has reflected a broader pattern of general underperformance against most G10 and low yielding EM currencies for most of the year (refer above charts).

We are expecting this grinding CAD underperformance to persist on account of unusually poor BoP fundamentals we have been flagging since early this year; there has been little to change our view here. Tracking this fundamental view has been difficult given significant volatility and distortions in observed flows around the COVID-19 crisis, but incoming data in the past month affirm highlighting these vulnerabilities. For example, recent trade data demonstrate how the bounce in global oil prices has not benefitted Canada’s trade account, as this price bounce was due in-part to large cuts in supply, especially from a high-cost producer like Canada.

Hence, contemplating prevailing minor upswings of USDCAD, at spot reference: 1.3103 levels (while articulating), boundary options strategy is advocated using upper strikes at 1.3167 and lower strikes at 1.3050 levels. One can achieve certain yields as long as the underlying spot FX remains between these two strikes on the expiration.

Alternatively, we recommend long hedges as BOC policy decision is scheduled for this week. This should inherently impart some upside pressure on the pair, hence, stay longs in USDCAD futures contracts of September’20 deliveries with an objective of arresting potential bullish risks in the major trend.

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 (spot reference:81.016 levels). It involves buying a number of ATM call and double the number of puts. Please be noted that the option strip is more of customized version of options combination and more bearish version of the common straddle. Courtesy: JPM