Canada dollar losing ground running up to rate decision tomorrow

Despite a Labour Day bank holiday, yesterday in the US, the Loonie lost more ground to the US dollarto close at 1.29300 after reaching a recent high last Friday at 1.31471,. The previous week the Canadian dollar managed a small rally, raising by 2.1%, mostly on the back of US dollar weakness.

This week could prove a bumpy ride for the Canadian currency as tomorrow there will be a scheduled monetary policy meeting by the Bank of Canada at 3pm. The general forecast is for the central bank to maintain interest rates at the current level of 0.50%. 

All eyes will be on the following statement and to what clues it may hold as to the timing of further interest rate cuts. At the previous meeting the central bank had cut is forecast for the Canadian economy by 0.3%, which did not justify additional monetary loosening.

At the last meeting on July 13th the USD/CAD dropped from 1.30677 to touch 1.29340 within one hour of the statement release, despite interest rates being kept on hold. The sharp decline was due to the pessimistic wording of the outlook for the Canadian economy. Price movement will depend greatly on the central bank’s view especially after weak data from the last releases for Retail Sales and Inflation.

If you feel that the volatility for this pair will increase over the following week then all you need to do is Buy a Straddle strategy, which consists of simultaneously buying a Call and a Put option with the same strike, expiry and amount.

The screenshot below shows a USDCAD Buy Straddle with a 1.2931 strike, 7 day expiry and for $10,000 would cost $97.79, which would also be the maximum risk.

This screenshot shows the profit and loss profile of the above USDCAD Buy Straddle, just click the Scenarios button.

If on the other hand you feel that volatility for this pair will decrease or remain flat then all you need to do is Sell a Straddle strategy, which consists of simultaneously selling a Call and a Put option with the same strike, expiry and amount.

The screenshot below shows a Sell Straddle with a 1.29301 strike, 7 day expiry and for $10,000 would generate $84.45, with a maximum risk of $284.45.

This screenshot shows the profit and loss profile of the above USDCAD Sell Straddle strategy.