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The BoC and the BoE appear to be looking to normalize monetary policy but experiencing similar difficulties. Both are involved in uncertain trade discussions that are weighing on investment and both have seen a softer patch of data than the market originally expected. Given it strips out the USD component and has similar risks to the front-end pricing, perhaps GBPCAD is an RV trade worth considering.
One big surprise of the trade war rhetoric has been the risk off we’ve seen in markets being driven more by the rise in oil and USD strength rather than trade actions. That is then followed by the disconnection between the underperformance of commodity currencies (e.g., CAD) and the improvement in their terms of trade owing to higher oil.
In our opinion, CAD rates pricing was one reason for the underperformance; there was simply too much priced in the belly of the curve in a fashion similar that was too close to US rates pricing. Then there is the impact of the US tax reform that has led to increased M&A outflows.
The sterling on NEER basis has been wedged into an unusually tight range, not so much owing to an absence of developments, especially on the Brexit front, more that investors just don't know what to make of these, either for the end-game to Brexit or the remainder of the process. This inability to see through the Brexit fog means that GBP trade-weighted has not budged from a month ago; it’s also within half a percent of the average since the referendum.
Buy 1M 25D GBPJPY put, sell GBPJPY call vs buy GBPCAD call, sell GBPCAD put (delta-hedged), vega neutral notionals. Courtesy: JPM & Nomura
Currency Strength Index: FxWirePro's hourly GBP spot index is at shy above 9 levels (which is neutral), while hourly CAD spot index is edging higher at 35 levels (bullish), JPY is at 34 (bullish) while articulating (at 11:16 GMT). For more details on the index, please refer below weblink:
