FxWirePro: CAD/JPY Outlook, OTC Updates and Options Strategy Ahead of BoC

The Bank of Canada (BoC) had already sounded more cautious in October. It expects that the resilience of the economy will be tested in view of the uncertainties and slightly lowered its growth forecasts for 2020 and 2021. Principally things are looking good for the Canadian economy, though: the unemployment rate is at historic lows and the stagnation in the industrial sector seems over, as the PMI has risen back above the 50 mark since the autumn.

Moreover the rates for overall and core inflation are on target. That means the BoC can afford to take a wait and see approach for now and to leave the key rate unchanged. However, due to the trade conflict and weak global growth the risks are pointing to the downside so that a rate cut would be more likely as the next step rather than a hike. As a precautionary measure the BoC is therefore likely to change from a neutral to a dovish bias at its meeting today so as to keep the door open for a future rate cut if the outlook were to deteriorate. 

Hence, CAD is likely to lose ground due to the changes to the wording of the statement, but is then likely to stabilise again. In the end the BoC had already prepared the move towards a dovish bias at the last meeting in October so that at second glance it should not constitute a surprise now.

OTC Updates and Options Strategy: 

The positively skewed CADJPY IVs of 3m tenors have still been signaling bearish risks, the hedgers’ interests to bids for OTM put strikes up to 79.500 levels indicating downside risks in the medium terms (refer 3rd exhibit). Please also observe above technical chart for the major downtrend and minor uptrend (1st & 2nd exhibits). Accordingly, we advocated options strips strategy to address any abrupt upswings in short-run and the major downtrend.

We’ve been firm to hold on to this strategy on both trading as well as hedging grounds, unlike spreads, combinations allow adding both calls and puts at a time in our strategy.

Buy 2 lots of 3m at the money delta put option and simultaneously, buy at the money delta call options of 1m tenor. It involves buying a number of ATM call and double the number of puts. Please be noted that the option strip is more of customized version of options combination and more bearish version of the common straddle. 

Huge profits achievable with this strategy when the underlying currency exchange rate makes a strong move on either downwards or upwards at expiration, but greater gains to be made with a downward move in next 3-months’ time. 

Hence, any hedger or trader who believes the underlying currency is more likely to spike upwards in short run but major downtrend can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid. Courtesy: Sentrix & Commerzbank