FxWirePro: Deploy USD/CAD knock out options as loonie likely to take flight

USDCAD is attempting to test key support at 1.30/1.2970, and a break will open the way to the May 2016 lows of 1.25. Recent highs of 1.3350 will cap short-term upside.

The loonie takes flight - These recent cross-currents are also emblematic of the offsetting medium-term forces that keep USDCAD relatively bounded in our quarterly forecasts.  The first is revised expected profile of WTI crude prices, after the recent developments from OPEC.  We now expect WTI crude prices to firm towards $53/bbl into year-end on the recent OPEC supply agreement, but then for prices to drop notably towards the $39-41/bbl range in 1H’18.  Against this, is the expected forthcoming start of BoC policy normalization, for which recently our economists pulled-up the forecasted start to 2Q’18 from 3Q’18.

Elsewhere, the Bank of Canada is signaling an imminent rate hike, if not in the July meeting then in September, and this is now priced in.

The BoC giving greater prominence to financial stability concerns stemming from high Canadian household indebtedness and regional housing booms.

Although our early 2018 target for USDCAD has been reached, Lonnie’s undervaluation should support further appreciation in the months ahead.

Trade more CAD upside - Canadian rates are pressuring the USDCAD again, irrespective of the recent oil turmoil.

BoC officials signaled a hawkish turn and the technical picture suggests that the USDCAD has broken below 1.30 as anticipated.

The low realized volatility makes a KO barrier unlikely to be hit, if suitably set.

Buy USDCAD 2m put strike 1.27 KO 1.23 @ 0.17%, vs 0.37% for the vanilla.