FxWirePro: Uphold USD/CAD hedging perspectives on global trade scenarios

Global trade headwinds are suddenly gusting stronger and pose distinctly-negative risks to CAD. Despite the seminal shift in monetary policy, CA rate spreads have actually compressed somewhat since the BoC meeting, following concerns on US inflation and global trade. 

Furthermore, Canada remains distinct in that it not only faces adverse consequences from a US-China fallout but is exposed to trade risk on the North American front as well. We’ve long been documenting the risks surrounding USMCA / NAFTA 2.0 ratification, with a particular emphasis on bipartisan divide which risks triggering a NAFTA 1.0 pull-out.

Canada’s trade balance shifted to CAD 0.76 billion surplus in May 2019 from an upwardly revised CAD 1.08 billion in the previous month and compared with market expectations of a CAD 1.5 billion gap. It was the second trade surplus since December 2016, as exports rose 4.6 percent to a record high driven by motor vehicles and imports increased at a slower 1 percent mainly due to aircraft. Exports to the US went up 3.7 percent to an all-time high of CAD 39.3 billion.

The USDCAD crashed through a number of key support points last month and losses overall were significant. The Jun month formed a bearish engulfing line, erasing May’s gains, and the net decline in last month alone reversed all of the cumulative net gains seen since Feb. Trend momentum signals are aligned bearishly across the short, medium and longer term timeframes which should mean only limited upside potential for the USD in the near-term. We spot key short-term resistance at 1.3150 and can allow the USD to squeeze back to 1.3225/50 above here but we think USD corrections are liable to attract strong technical selling pressure.

On hedging grounds, at spot reference: 1.3172 levels, contemplating above factors, we advocated initiating shorts in USDCAD futures contracts of July’19 delivery as further downside risks are foreseen and simultaneously, longs in futures of August’19 delivery for the major uptrend. Thereby, one can directionally position in their FX exposures. We now uphold the same directional implementation of the same trading theme by further allow for a correlation-induced discount in the options trading also if you choose strikes appropriately.

Alternatively, at the same spot reference, buying 3m ITM call (with strikes of 1.3070) have also been recommended. Such options with strike prices close to the price of the underlying spot tend to have the highest risk premium or time-value built into the option prices. This is compared to deep in the money options that have very little risk premium or time-value built into the option price.

Thereby, one can achieve hedging objective as the deep in the money call option with a very strong delta will move in tandem with the underlying spikes. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly CAD spot index is inching towards -81 levels (which is highly bearish), USD is at -25 (mildly bearish), while articulating (at 07:41 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex