FxWirePro: No room for BoC’s shift and EUR/CAD “Diagonal Debit Put Spread” for smart hedge

Following yesterday’s Bank of Canada (BoC) meeting the question arises as to whether the central bank is still in control.

Its view of the economic situation and therefore in the end also its future monetary policy depend on the expected trade policies of the new US President Donald Trump.

In the end, the BoC has no choice but to hope that CAD will not appreciate excessively. And even in this respect, it depends on external factors such as the oil price.

Amid the mixed bag of data, and not supportive of a material shift in BoC stance.

OTC updates and hedging vehicles:

Hence, at spot ref: 1.4224 (while articulating) we advocate below FX derivatives strategy as we favor optionality to the directional trades. After a series of bullish attempts in this month, we are inclined to position for the major trend continuation of the downward move through put spreads, as calling the bottom is difficult and adding directional spot exposure is risky at the moment.

Alternatively, using any abrupt rallies, you decide to initiate a diagonal debit/bear put spread (DDPS) at net debit, 1w ATM IVs of EURCAD is just a tad below 9.5%, and skews in 1m tenor are equally distributed towards both OTM call and put strikes.

The execution: Initiate shorts in 1W (1.5%) out the money put with positive theta, simultaneously, buy 1M in the money -0.5 delta put option. Establish this option strategy if you expect that EURCAD would either expect sideways or spike up abruptly over the next near future but certainly not beyond your upper strikes.cen