FxWirePro: Is Crude Oil Prices Really Pressuring Canadian Currency? Hedging Perspectives Of CAD

The fact that despite the renewed collapse of the oil price, the commodity-driven currency Canadian dollar’s losses are limited is unlikely to be seen as an entirely positive development domestically. A weaker currency would be quite helpful to cushion the negative economic effects of the collapsing oil price at least partially. Of course, a very rapid depreciation would not be desirable either, Norway at least seems to have reached a good half way house. 

WTI crude futures have slid in negative zone, while spot crude prices are trading at $11.28 levels a barrel. The recent distortions on the oil market are less likely to be the cause but instead, the trigger for the market to reveal its worst fears regarding the economic extent of the corona crisis. After all, analysts seem to have agreed quite quickly following the extraordinary collapse of the oil price on the futures market that this was due to technical factors. The oil price nonetheless slipped considerably yesterday, in line with a general risk-off move on the markets.

CAD, having depreciated massively last month following the last fall in the oil price, the central bank came to the Norwegian krone’s rescue and threatened interventions in support of the currency which has contributed to some stabilisation of the exchange rates since. 

Overall, the Norwegian currency has depreciated against the US dollar by approx. 12%, the Canadian dollar by approx. 6%. At least on that front the Norwegian economy might find a little more support.

USDCAD: At spot reference: 1.4028 levels, the debit call spreads have been advocated, we, now, upheld our previous strategy for USDCAD on hedging grounds via 3-month (1.3815/1.45) debit call spread.

CADJPY: At spot reference: 77.417 levels, shorting futures contracts of mid-month tenors on hedging grounds, it has been performing as desired so far. Ahead of BoJ monetary policy that is scheduled on 28th of this month, we wish to uphold the same strategy as the underlying spot FX likely to retest southwards at 74 levels in the medium terms. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.

Alternatively, we advocate options strips with diagonal tenors, in which, it comprises of buying 2 lots of 3m at the money delta put option and simultaneously, buy at the money delta call options of 1m tenor. Courtesy: Commerzbank