Tankan business sentiment improved in Q4 but looked cautious heading into Q1’7.

However, large manufacturers assumed the JPY would be much stronger than it is.

FY16 CapEx plans were revised up, but the projected y/y increase remained small. Machinery orders support our outlook for a continued gradual recovery in CapEx.

Corporate inflation expectations, though still subdued, have finally turned up, similar to household inflation expectations, reflecting recent JPY and commodity moves.

On the flip side, The Canadian dollar has posted small gains in the Thursday session. It continues to be quiet on the release front, with no Canadian events this week.

As the Canadian dollar is a commodity-sensitive currency, any movement in crude oil prices can affect the movement of CAD crosses, especially USDCAD. Crude prices remain strong, as the recent agreement between OPEC and other oil exporters, which calls for production cuts, is expected to begin on January 1. Under the agreement, production is expected to drop 1.8 million barrels per day

CADJPY spot is likely to approach supports at 87 levels but the trend has been bearish biased in near terms and as a result CFDs of this pair slightly have been drifting down. Hence, below option strategy is advocated.

Hedging Framework:

3-Way Options straddle versus Call
Spread ratio: (Long 1: Long 1: Short 1)

How to execute:  

Go long in CADJPY 1M at the money delta put, Go long 1M at the money delta call and simultaneously, short 1M (1%) out of the money call with positive theta.

If one is bearish to very bearish, then one can even eye on writing ATM or ITM calls as well as an alternative to shorting the underlying spot FX.