By: Andrew Keene
The Rydex Currency Shares Canadian Dollar Trust, or FXC, is an ETF designed to reflect the price of the Canadian Dollar in USD. The loonie fell relative to its American counterpart on softer-than-expected inflation data and bolstered consumer confidence numbers in America. This round of macroeconomic data served to cut off a brief rally in FXC.
Brief is the operant word in the prior statement. The fund has tumbled since a rally at the end of April that stretched into early May amidst growing uncertainty in Canadian markets and increasing pressure on Canadian regulators and bankers. The Bank of Canada faces a delicate balancing act as must attempt to both gradually deflate the housing market and encourage growth in other, lagging, industries. Poor inflation and consumer confidence data may push the central bank towards more loose monetary policy. The attitude of the soon-to-be head of the Bank, Stephen Poloz, towards QE and related policy is of an unknown quality, though international actions may force his hand regardless of his wishes.
It seems unlikely that Canada’s economy will avoid contraction in the near term. Housing is inarguably overpriced, and employees that and related industries make up ±27% of Canada’s economy. The market will likely be contained through microprudental measures; though these policies will have to be potent enough to counteract growth focused monetary and fiscal policy but delicate enough to avoid a rapid contraction. The bumbling attempts of other nations’ bureaucrats to engineer similar measures demonstrate that the perfect policy is unlikely to emerge and the Canadian economy, as well as the loonie, are poised for another tumble, and CAD ETF’s with them.
The near-the-money 97 December straddle is priced at $3.35; this means the options market makers are implying a move of around 3.5 percent by the December expiration.
Buying the FXc June 97 - 93 Put Spread for $1.35
Risk: $135 per 1 lot
Reward: $265 per 1 lot
Greeks of this Trade: