FxWirePro: CAD/JPY bullish/bearish scenarios, OTC indications and derivative trading perspectives

Bearish: CADJPY scenarios driven by:

1) NAFTA renegotiations break down and breakup fears return.;

2) US growth expectations upgraded on policy driving a broad $ rebound

3) The global investors’ risk aversion heightens significantly

4) The expectations for more hawkish than expected stance of the BoJ if inflation expectations heighten

Bullish: CADJPY scenarios driven by:

1) Local oil prices remain sustainably above $60/bbl triggering a renewed investment cycle

2) The dovish shift of the BoJ monetary policy, resulting in higher stock prices and JPY depreciation.

3) Severe deterioration of US politics and geopolitics dent US growth expectations and further widen out the broad dollar discount much further

OTC outlook and FX options strategy: Option strips (CADJPY)

CADJPY is one of the better candidates since recent CAD weakness has undershot recent moves in oil and rate spreads.

Well, please be noted that the positively skewed ATM IVs of 2m tenors indicate the hedging interests of OTM put strikes upto 82 levels.

Technically, we’ve already stated in our recent write up, the current week prices slid well below 21EMA levels with bearish crossover and broken wedge baseline with intensified bearish momentum, thereby, one could expect more slumps as both the leading oscillators have been constantly converging downwards to signal weakness (refer our post on technical section).

To factor-in all above stated driving forces, we reckon that the underlying pair has equal chances of moving on either side but with more potential on downside, accordingly, it is wise to initiate longs in 2 lots of 2m ATM -0.49 delta puts, simultaneously, add long in 1 lot of +0.51 delta call of the same expiry, the payoff function of the strategy is likely to derive positive cashflows regardless of swings but more potential from the underlying spot FX moves towards downside.

The risk is limited to the extent of premium paid to buy the options.
The reward is unlimited until the expiry of the option.

Please note that the trader can still make money even if he was wrong, that means the strategy likely to derive handsome yields in premiums regardless of swings. But the spot FX has to move in the opposite direction really fast. The 1 call bought has to beat the cost of buying all the options and still bring in some profits.

Currency Strength Index: FxWirePro's hourly CAD spot index is displaying shy above 9 levels (neutral), while hourly JPY spot index was at 71 (bullish) while articulating (at 07:33 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

FxWirePro launches Absolute Return Managed Program. For more details, visit: 

http://www.fxwirepro.com/invest