USD/CAD short term trend reversal began; add bear call spreads

The US non-manufacturing ISM survey will be a closely watched event for today.

It is likely to evidence of a return to activity growth from the contraction seen in the official data over the course of Q1.

Despite the stronger than anticipated increase in manufacturing PMI earlier this week, we look ahead to the non-manufacturing ISM to fall modestly to 57.5 a level historically consistent with above trend GDP growth.

Technical Watch: (USD/CAD)

On daily charts USDCAD breached short term trend line support at 1.2524 levels.

Since it has breached this level we now suspect the pair to slip a steep below until 1.2425 levels 1^st and then bottoming down upto 1.2380 levels.

Currently, RSI (14) trending at 58. 8609 has begun showing the downward converging price.

While Slow stochastic has shown a crossover above 80 levels which would be deemed as overbought situation with %D line at 90.2931 & %K line at 90.4207 levels.

Hence, the short term trend reversal is about to occur.

Currency Option Basket:

For long term hedgers as stated earlier, Vega on longs iron butterfly suggests lucrative option and that should prevail.

Iron Butterfly (USD/CAD) = Long OTM Put (strike at 1.2380) & Short ATM Put (1.2505) + Short ATM Call (1.2505) & Long OTM Call (strike at 1.2630).

For short term traders, Bear Call Spread (strike at 1.2537 & 1.2291) is recommended.

Long OTM call with strike at 1.2537 and short ITM call with strike at 1.2291.

The maximum return can be achievable using this strategy at net credit received upon shorting OTM call.