FxWirePro: EUR/CAD Regains Ahead of BoC And ECB And Deploy Suitable Hedging Vehicles

Bank of Canada is scheduled on this Wednesday, they held their policy rate unchanged at 1.75% in Governor Poloz’s fourth-from-last decision, a small deceleration in headline CPI with unchanged ‘core’ CPI inflation, and mixed macroeconomic readings on the health of the economy during November. 

Ahead of BoC and ECB monetary policies scheduled for this week, EURCAD slips back in Jan trading so far to retest channel support in the low 1.44s. While Growing evidence of economic stabilisation in the Eurozone supports expectations for the ECB to keep policy on hold this Thursday and through the year.

EURCAD remains soft but confined to a range. The EUR has spent the New Year trapped between noted support in the low 1.44 area and resistance at 1.4590/00. Minor gains through the upper 1.45s earlier this month failed to extend and the broader undertone for the cross is starting to look weak again. We still rather think the overall outlook is neutral/positive for the EUR after the late 2019 price action solid weekly and monthly bull reversal signals driven off the 1.44 zone. 

But the short-term trend signals are starting to tilt against the EUR somewhat and we think the cross will need to pick up more obviously (above 1.46) sooner rather than later, if it is to avoid further weakness. The pair’s stealthy gains have come to a not so stealthy end, at least for now. We noted the rise in the cross would perhaps need to trade through 1.4750 in order to signal a break out but the EUR failed to hold on to rise through the mid 1.47 area .

Because of the comatose state of currency markets at present, CAD option risk premia appear oblivious to the fallout of this high stakes standoff. EURCAD risk-reversals in particular appear too complacently priced: at zero across the curve, they are well discounted to already low USDCAD risk-reversals (3M 0.35, 1Y 0.7), and under-priced relative to even tepid recent realized spot- vol correlations (SABR implied 6M spot-vol corr. in EURCAD r/r 1% vs. trailing 1m spot-vol corr 15%). 

BoC monetary policy is scheduled for the next week and they are most likely to maintain status quo.

While positively skewed IVs of EURCAD have also been indicating upside risks, bids for OTM Calls are on high demand as the hedging sentiments for upside risks are intensified (refer above nutshell). 

Hence, 3m (1%) +0.70 delta in the money call option seems to be the most suitable strategy for EURCAD contemplating some OTC sentiments and monetary policy events. 

Alternatively, we advocate shorts in EURCAD futures contracts of February’2020 delivery with a view of arresting abrupt price slumps and simultaneously, add longs in futures March’2020 on hedging grounds for potential resumption of the major uptrend. Thereby, one can directionally position in their FX exposures. The directional implementation of the same trading theme by further allow for a correlation-induced discount in the options trading also if you choose strikes appropriately. Courtesy: Sentry