FxWirePro: Loonie mixed but vulnerable - Calendar straddles for delta-hedge

G10 currencies remain narrowly mixed in relatively quiet markets. While loonie at 1.3161, CAD remains quiet as it continues to consolidate around the midpoint of its one week range. The broader tone appears tentative and most global equity indices are lower. 

The USD is strengthening broadly into Tuesday’s NA open, pushing AUD and NZD to fresh two-year lows. CAD seems to be vulnerable as yield spreads widen; high level NAFTA talks resume in DC. USDCAD price signals remain somewhat mixed. Short-term patterns suggest decent selling interest in and around the low 1.32 area (bearish “evening star” signal on daily chart through last Thursday) while we expect firm support on dips to the 1.31 zone. 

Headline risk is elevated as market participants look to the latest NAFTA talks and high-level discussions between Freeland and Lighthizer (scheduled for 11am ET). 

Domestic risk lies with the 8:15am ET release of housing starts however broader developments are likely to dominate. Interest rate differentials are widening in a CAD-negative manner and the 2Y U.S.-Canada spread has pushed back above 60bpts. 

Measures of implied CAD volatility are elevated and risk reversals are pricing a sizeable premium for protection against CAD weakness.

Trade tips: Buy 2M USDCAD straddles vs short 2M USDCOP straddles, in 1.4:1 notionals, delta-hedged. 

Currency Strength Index: FxWirePro's hourly CAD spot index is at shy above 26 levels (which is mildly bullish), while hourly USD spot index is edging higher at 101 levels (highly bullish) while articulating (at 13:23 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex