2017: Long USD/CAD 15Dec17 call spread

We said:

Market pricing is for another hike, probably by the end of this year. But relative economic surprises between the US and Canada have flipped in favour of the US. The currency cross tends to move in line with such shifts, reflecting the assumption that central bank policy expectations will follow relative economic performance. In any case, as expectations for Canada are now elevated, the upside for CAD is limited. Seasonal factors are another reason to expect a dollar bounce. This is particularly true of the USD/CAD pair, which has rallied in Q4 in each of the last four years.

We add to USD/CAD through a new call spread: 15 Dec 1.2350-1.2750 in 1x2 ratio, for 35bp (1.2150 spot ref), with a potential pay out of 9x premium at 1.2750. This trade will begin to lose money above 1.3150; it reflects our view of a dollar bounce rather than a secular shift, but if spot breaches 1.27 we will consider taking the trade off.

 

Outcome:

Trade closed on 18 October 2017 with the contract priced at 92bp for a profit of 57bps. 

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