Deprived investment intent rises BoC rate cut hopes; use iron buttefly as CAD likely sense low volatility

The BoC's Q2 Business Outlook Survey showed a marginal improvement from Q1 but was still overall very soft on all fronts.

Investment intent in machinery & equipment remains extremely weaker, rising just slightly to 7.0 from 4.0 (compared to a 2014 average of 18.0); employment intentions ticked higher but are still weaker than through most of 2014 and while inflation expectations softened.

The big question is what it means for the BoC decision next week, and the market has taken this as a slight increase in the chance of a cut pricing in another 1-2 bps.

That leaves pricing near 40-50% for a 25 bps cut on July 15. That makes sense given that this report doesn't seem to offer a clear trigger for the Bank, so expectations remain on the fence. With the trade balance data today and employment claims on Friday, there is still potential for greater pricing of a cut, though, and in our view that should leave CAD on the defense for this week at least. We expect the FX streets to experience the low volatility amid unfavorable business climate.

Currency Option Basket:

For long term hedgers as stated earlier, Vega on longs iron butterfly suggests lucrative option.

Iron Butterfly (USD/CAD) = Long (-1%) OTM Put (strike at 1.259) & Short ATM Put (1.2717) + Short ATM Call (1.2717) & Long (1%) OTM Call (strike at 1.2844).

For short term traders, Bear Call Spread (strike at 1.2844 & 1.2588) is recommended.

Long OTM call with strike at 1.2844 and short ITM call with strike at 1.2588.

The maximum return can be achievable using this strategy at net credit received upon shorting OTM call.