Technical Glimpse:

Around a fortnight ago, we had anticipated bearish calls accentuating on whipsaws resistance at 0.9955 and break below of channel support, now see the evidence of their bearish effects. For now, the pair is expected to continue the major trend which is bearish.

To substantiate this stance, a bearish engulfing (at 0.9522) previous day’s bull candle with big real body, bear swings consistently slip through DMAs. Gap down with bear candle after bearish engulfing, 7EMA crosses below 21EMA, RSI, Stochs & MACD indicative of bearish trend continuation.

Economic Data Events & OTC Observation:

Despite the monetary policy divergence between BoC and RBA, OTC market doesn’t seem to have factored in these developments. 1W ATM IVs of AUDCAD contracts are stagnantly creeping up from current 9.57% to 9.11% of 1m tenors.

Given the prevailing economic conditions, the BoC stood pat at its current policy stance at April’s meeting as well (overnight rates were at 0.50%).

On flip side, The RBA cut the cash rate by 25bps yesterday to combat low inflation, and is likely to follow up with another rate cut in the near term, although we will firm up our expectation of the timing after Friday’s Statement on Monetary Policy.

Australian trade balance and retail sales is scheduled to be announced today, RBA monetary policy statement review for tomorrow, while Canadian trade balance is lined up for announcement shortly which is likely to have narrowed from previous -1.9B, and Canadian unemployment rate on Friday.

FX Option Strategy: Short Put Ladder (AUDCAD)

1W ATM IVs of AUDCAD contracts are stagnantly creeping up from current 9.57% to 9.11% of 1m tenors.

As we focus on this decreasing IVs in OTC that is favourable for options writing opportunities. Low IV implies the market thinks the price will not move much.

When we observe the sensitivities of option’s various strikes to a change in volatility, it meant more chances of spot FX curve to drift through southwards.

Hence, the recommendation is to deploy "short put ladder spreads" that contains proportionately less number of shorts and more longs which would take care of potential slumps on this pair.

Buy 1M ATM -0.49 delta put + Sell 1W (1%) OTM put option + Sell another deep OTM put option (1.5%) with 2W tenors, narrowed tenors would create more chances of generating positive cash flows.

More shorts because, as stated above reduced or lower IV implies the market thinks the price will not move much.

We reckon that for next 2 months time CAD would gain reasonably on account of rising oil prices and stable monetary policy by Canadian central bank.

This would mean that market sentiments for this pair have been bearish for this pair.

So, shorts on OTM put with shorter expiries are advised since implied volatility is not inching higher with rapid speed when either sideways or mild upswings are on the cards.