We continue to maintain our bearish stances as the ongoing downtrend to prevail further ahead of today’s economic numbers such as BoE’s inflation report, PPI and preliminary GDP QoQ.

Glimpse on UK Fundamentals:

We continue to maintain our bearish stances as the ongoing downtrend to prevail further ahead of today’s economic numbers such as BoE’s inflation report, PPI and preliminary GDP QoQ.

The recent manufacturing, construction & service PMIs of UK were quite disappointing, CAD is cushioned by rising and stabilized crude oil prices.

Most importantly, BoE's monetary policy decision has been unchanged that means any underlying factors unlikely to cause much impact on this pair in short run.

However, in long term we expect the British Pound could weaken further on brexit event and any consequent confusion if the BoE statement hints towards further easing.

GBP OTC FX updates:

2m GBPCAD ATM implied volatilities have been spiking above 15.38% which is a good news for option holders, but those who haven’t hedged sterling’s uncertainty against other major crosses than USD on event risks (UK referendum) which is almost a month away from now has to have a big reason to worry whether spot FX would move in sync with these vols or not.

GBPCAD is one among such pair where CAD’s strength is intensifying gradually on account of rising crude oil price as stated above while GBP’s further downside risks are underpinned.

Hedging Perspectives:

We now keep an eye on decisive breach resistance at 3.9575 levels, options straddle is the best suitable in such range bounded circumstances in put with 50% delta.

Long options straddle that fetched unlimited returns during above mentioned higher implied volatility scenarios short term.

So, initiate long in 2M at the money -0.49 delta puts, simultaneously go long in 2M at the money +0.51 delta call and limited risk to the extent of initial premiums paid options.

Alternatively, brexit risks could also be hedged through structures that are implicitly long of GBP correlations, for instance GBPUSD puts with RKOs in GBPCAD or dual at-expiry digitals (GBPUSD down, GBPCAD up), albeit the cost savings compared to vanilla puts is limited as the term structure of forward GBP correlations is already relatively steep.