Trade Idea: CAD

I think the CAD will be one of the more interesting currencies in the G10 currency bloc this week, given the Bank of Canada meet on Thursday (00:00 AEST).

Canadian Dollar
Source: Bloomberg

As things stand, 16 of the 29 economists polled by Bloomberg are calling for the Bank of Canada (BoC) to cut rates by 25 basis points, with the swaps market pricing this as a near 50:50 event. The prospect then of volatility is elevated, although one-week’s implied options volatility is fairly low and buying a weekly 12850 call on USD/CAD for 34 points seems a compelling way of playing a potential move.

Canada is running a record trade deficit, the service sector (specifically outside of a focus on oil) is weak and the prospect of Iran putting further supply into the oil market is keeping revenue from oil exports suppressed. Economists are also expecting the central bank to lower its growth forecasts from the current rate of 1.9% for 2015, with calls of revisions towards 1.3%.

Importantly, the BoC feels the prospects are for a stronger 2H, so this could be one reason for the bank keeping rates on hold but I think it is a very close call and market pricing seems fair.

The best way to play the meeting in my mind is to buy weakness in either USD/CAD or GBP/CAD. This strategy would allow for the repricing of the CAD if rates are left on hold but would allow for a subsequent reversal as the accompanying statement should leave the door open for future cuts.

I feel buying USD/CAD into C$1.2695, with a stop at C$1.2640 and GBP/CAD into C$1.9650 makes sense.

Both ideas are aligned with the trend as well.


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