FxWirePro: Accept EUR/CAD uptrend with pinch of salt and arrest FX risk via call ladders with truck load

Contemplating the recent fundamental, technical and OTC developments, we’ve devised options strategy for EURCAD on hedging grounds.

Mechanics: Buy EURCAD 2m ladder, strikes 1.4080/1.4678/1.4988 (we wouldn’t like to be precise about the indicative offer, certainly assured but slightly lower than vanilla structure, spot ref: 1.4678).

Rationale: We’ve already stated that there has been stiff tug of war between EURCAD bulls and bear in the recent past.

Technically, EURCAD has been drifting in the range between 1.4988 -1.4457 from last 3-4 months. We foresee the trend is likely to hover in the similar range but certainly not any dramatic spikes nor slumps.

Large options set to constrict today’s range.

Fundamentally, Canadian growth considerably breaks out, convincingly decoupling and outperforming the US. The most recent 4.5% QoQ, SAAR 2Q GDP growth print is highest quarterly sequential growth rate since 3Q’11, and reflects a genuine sustained acceleration in growth, with the prior three quarters averaging a 3.5% pace of growth, following six quarters averaging 0.5% annualized growth in the period following the collapse of oil price.

The EURCAD appreciation is now going to be slower than it has recently been, and the skew is still undecided whether volatility should rise on the back of a higher or lower spot (refer above nutshell evidencing IV skews). As such, we do not focus on intermediary vega gains to favour instead a buy-and-hold structure benefiting from the passage of time, as the timing of euro upside is less certain.

Risks profile: See unlimited risk above 1.4988, the above structure exposes investors to unlimited risks if the EURCAD trades above 1.4988 at the 2m expiry, a level not seen since last month.