FxWirePro: Petro-currency bloc still appears cheaper – Hedge via vanilla options as crude inches higher range

The rankings of currencies on this framework are mostly unchanged this month. The cheaper basket continues to be dominated by SEK and GBP in G10, while the richer end of the spectrum still comprises USD, EUR, and the Antipodeans.

The mispricing of petro-FX in this framework has been mixed in the past month with CAD getting modestly richer and NOK weakening modestly, adjusted for drivers. The main change in the framework has come from terms of trade (i.e. higher oil prices) in the past month.

Hence, this suggests that while CAD has strengthened by modestly more than that implied by the rise in oil prices, NOK has lagged. In any case, both NOK and CAD continue to be near fair value but cheap relative to the Antipodeans (refer above chart).

USD has gotten richer on the framework and is rich on a cross-sectional basis, but still is 10% pts cheaper than 2016 levels indicating that there continues to be two-way risk to the currency.

An oil price breakout into a higher range is most meaningful for those currencies where output gaps have already closed and the central bank is normalizing. Among petro currencies, CAD fits this description, and we pair a long here versus AUD, where iron ore has de-correlated with the broader commodity complex, where AUD itself has de-correlated from commodity prices, and where RBA is expected to remain on the sidelines.

Long a 1m 0.9693-0.9550 AUD put/CAD call spread.

Subsequently, we advocate buying USDCAD 1m debit put spreads using strikes 1.2925/1.2678 (at spot ref: 1.2840).

Aggressive bears, deploy 1m USDCAD ATM -0.49 delta puts as CAD rates recently climbed above USD rates for the first time since 2014, and our USD rates projections can realistically drag the USDCAD to 1.27 levels.

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