FxWirePro: CAD risk premia on USMCA and BoC events

BoC arrives Wednesday at 10amET along with the Monetary Policy Report that includes refreshed forecasts. Governor Poloz and SDG Wilkins will host a press conference at 11:30amET.

The Canadian monetary policy announcement will be more about jawboning uncertainties within a base case policy framework that is in no rush to change. Having said this, the broad tone of the communications is likely to walk more on the cautiously optimistic side of the equation in such fashion as to remain faithful toward the Governor’s rebound narrative. If so, then at a minimum, the communications could be the further unwinding of near-term curve inversion.

NAFTA bloc vols and risk-reversals can jump, if we are correct that a standoff between the Trump administration and the Democrat-controlled House around the issue of USMCA ratification is higher odds than the market gives it credit for. BoC (Bank of Canada) on the other corner, is a major event for this week. 

Hence, the CAD risk premia flags that owning EURCAD and EURMXN risk-reversals are good value hedges against a NAFTA accident. 

We also continue to be positioned short CAD via a long-held CAD put/CHF call vs. USD put/CHF call option spread. 

Ever since the low-likelihood threat of a US government shutdown became reality earlier in the year, our macro team has worried about another President Trump vs. Democratic House confrontation upending what was considered to be routine Congressional ratification of 2018's USMCA trade agreement. 

We emphasized in the recent past that the administration is minded to complete the process by August, but this compressed timeline could put the President on a collision course with House Speaker Nancy Pelosi sooner rather than later. 

Risks are that Trump actually withdraws from NAFTA 1.0 as a negotiating tactic in order to force the issue with the House – an option he and ranking members have been vocal about – leading to punitive sell-offs in CAD and MXN. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at 94 levels (which is bullish), hourly USD spot index was at 48 (bullish) while articulating at (10:41 GMT). 

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