BoC firmly on hold: The lukewarm outlook indicates that the Bank of Canada would keep policy steady in the face of Fed tightening, which should nudge USDCAD gradually higher through mid-2017. The loonie remains highly correlated to oil prices, but it will likely not be able to resist broad US dollar strength (refer above graph).

Following last month’s Bank of Canada (BoC) meeting the question arises as to whether the central bank is still in control. Its view of the economic situation and therefore in the end also its future monetary policy depend on the expected trade policies of the new US President Donald Trump.

The data are mixed, and not supportive of a material shift in BoC stance.

OTC updates and hedging vehicles:

Hence, at spot ref: 1.3966 (while articulating) we advocate below FX derivatives strategy as we favor optionality to the directional trades. After a series of bearish streaks in this week, we are inclined to position for a partial retracement of the down move through put spreads, as calling the bottom is difficult and adding directional spot exposure is risky at the moment.

Alternatively, using any abrupt rallies, you decide to initiate a diagonal debit/bear put spread (DDPS) at net debit 1w ATM IVs of EURCAD is at 7.69%, and likely to spike higher 8.4% in 1-3m tenor.

The execution: Initiate shorts in 1W (1.5%) out the money put with positive theta, simultaneously, buy 1M in the money -0.5 delta put option. Establish this option strategy if you expect that EURCAD would either expect sideways or spike up abruptly over the next near future but certainly not beyond your upper strikes.