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We had earlier reaffirmed holding onto long CAD following the unexpectedly dovish BoC meeting in the recent past on the ongoing likelihood of a near-term NAFTA breakthrough, and on the observation that BoC pricing was not particularly stretched and requiring substantial repricing.
Such a NAFTA breakthrough would still likely trigger some near-term downside to USDCAD through the risk premium channel, and also on a de-pricing of BoC relative dovishness (especially if such a breakthrough were to happen before the BoC meeting, and Canadian central bank’s rhetoric recognized the reduction of broad downside risks from US trade policy).
However, admittedly, given the level of the strikes, we would also need some broad retracement of the dollar lower at the same time for option structure to expire in the money.
But with the stronger dollar changing market dynamics over the past week, CAD underperformed and CADJPY corrected lower. That still leaves us with a low-delta USDCAD RKO which we intend to hold as the cost was only 14bp.
If the NAFTA breakthrough does come in the next six weeks, this trade should still perform. In addition, the less aggressive BoC pricing reduces the risk of USDCAD now undershooting on the downside and so triggering the barrier.
We buy a 2m 1.30 USDCAD put, Reverse Knock-outs 1.25 while squaring off CADJPY positions, simultaneously, the short hedges were also suggested.
While simultaneously, Initiate shorts in futures contracts of mid-month tenors with a view to arresting further potential slumps.
Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.
Currency Strength Index: FxWirePro's hourly CAD spot index is displaying shy above -42 levels (bearish), while USD flashing at 31 (bullish) while articulating (at 13:08 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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