FxWirePro: Dollar robustness to intensify ahead of Fed hiking cycle - USD/CAD “Call Spreads” for fuzzy ruble

The FOMC is likely to enact a 3rd hike in the federal funds rate this week. On Wednesday, March 15, the FOMC is likely to hike its funds rate by 25 basis points for the third time during the current economic expansion.

As a result, US Dollar Index faces strong support at 100.60, good to buy on dips 

Major intraday support – 100.60 (24th Feb 2017 low).

U.S. Dollar index has taken support at 55- day EMA and jumped slightly from the level .It is currently trading around 101.25.                

We hold USDRUB call spreads on a view of gradual ruble depreciation. Ruble has depreciated 2.7% vs. the dollar since its peak strength on 14th February, following increased verbal intervention by officials.

Despite the recent bout of RUB weakness, RUB is still rich on our short-term and long-term models. We envisage a further gradual decline in ruble, holding USDRUB call spreads to position for this.

First, FX interventions are likely to be a greater drag on the spot rate going forward (the MinFin so far has bought RUB 94.7bn worth of FX since the program began on 8th February), as seasonal support for the current account deteriorates heading into Q2.

Second, there is scope for a further unwinds of long RUB positions, which can weigh on the currency.

The latest JPM Client Survey shows investors reduced their long RUB positions from multi-year highs, and further reductions are possible in their view given the still sizeable OW investors hold (see above diagram).

Hence, go long in 3m ITM call (strike 57.7959), while writing an OTM call (strike 61.9938) of 1m tenor, the spread structure is constructed at net debit.