FxWirePro: Driving forces of CAD and JPY – Trade options straps and bid short hedges

The driving forces of CAD:

• NAFTA negotiations turn south especially for Canada; 

• Canadian growth slowdown extends vis-à-vis US; (3) Local oil prices weaken further 
• BoC signals a more aggressive path of rate hikes; 
• A broad US dollar discount returns because of political risks; 

Despite some
softening in the data recently, cyclicals should still be cyclically supportive of CAD in the medium term by a 20 confident BoC that will likely deliver a second 0 consecutive quarterly hike next month.

The driving forces of JPY:

• The global investors’ risk aversion heightens significantly
• PM Abe stepping down scenario is most likely to cause huge turbulence in Yen.

JPY is likely to remain a mediocre currency in the coming months due to the tug-of-war between the uncertainty of international politics (which is a JPY bullish factor) and overseas investment flow by Japanese corporates and investors (which is a JPY bearish factor). First, we would like to highlight a JPY bearish factor — overseas investment by Japanese corporates and investors.

Technically, CADJPY forms gap-up opening chart patterns at 88.470 levels (which is bullish in nature) that takes-off price rallies well above DMAs and EMAs, more upside traction is foreseen in the short-term trend.

While on a broader perspective, the major downtrend of this pair has gone in consolidation phase since December 2015 (refer monthly plotting for range-bounded trend). For more details, refer our technical section.

Options Trading Strategy (CADJPY): 

Contemplating both fundamental and technical factors, it is sensed that all chances of Canadian dollar may look superior over Japanese Yen in the near-term future; we advise to hedge the JPY’s depreciation over CAD through below recommendations.

We’ve been firm to hold on this strategy on both trading as well as hedging grounds, unlike spreads, combinations allow adding both calls and puts at a time in our strategy.

Buy 1m At-The-Money delta put option and simultaneously buy 2 lots of At-The-Money call options of similar expiries. It involves buying a number of ATM puts and double the number of calls. The option strap is more of customized version combination and more bullish version of the common straddle. 

Huge profits achievable with the strap strategy when the underlying currency exchange rate makes a strong move either upwards or downwards at expiration, with greater gains to be made with a upward move. Hence, any hedger or trader who believes the underlying currency is more likely to spike upside can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid.

Currency Strength Index:

FxWirePro's hourly CAD spot index is inching towards 49 levels (which is bullish), while hourly JPY spot index was at -7 (neutral) while articulating (at 07:40 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex