Use of FxWirePro’s KO options strategy serves cost effective optimal hedging after BoC’s action

The loonie keeps flying after BoC’s rate hikes of 25 bps. The CAD was near 13-month highs after its country's central bank hiked interest rates.

We’ve seen breach below 1.29 levels as anticipated. And accordingly, we’ve advocated suitable hedging strategy. Visit below weblink for more reading on it:

http://www.econotimes.com/FxWirePro-Luring-Lonnies-optionality-USD-CAD-unlikely-to-hit-123-knocks-out-from-above-132-786890

An outstanding example was the development of the Canadian dollar yesterday and you’ve seen that our knock-out option strategy has been functioning optimally so far, rest is history.

Following the Canadian central bank’s decision yesterday it was able to appreciate notably against the US dollar. Despite the fact that the BoC’s rate hike had been priced in almost entirely by the market.

So, what was decisive was the BoC’s rhetoric. It seemed very optimistic regarding the future economic and inflation outlook which caused the market to expect that there will be another rate step soon. Even if we were incorrect yesterday with our expectation of unchanged interest rates, we remain cautious as it is far from clear to us that the central bank would raise interest rates very quickly again.

After all, it is facing one difficulty: the current USD weakness. Since early May CAD has appreciated by approx. 8% against the US currency. If the BoC really were to hike interest rates again soon while the Fed is taking a rate break it risks fueling rate expectations to such an extent that CAD will appreciate even further thus endangering its economic and inflation outlook.

We, therefore, consider it to be more likely that the BoC will wait for the Fed’s next rate step before taking action again so that CAD will be able to appreciate only gradually against USD – if at all.

We would still like to uphold the same strategy as the potential slumps are foreseen and the below options strategy likely to arrest further bearish risks.

Buy USDCAD 2m put strike 1.27, knock-out 1.23 Indicative offer: 3% (at spot ref: 1.2730).

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