Forex Investment and Currency Trading

Sellers of USD/CAD should focus on resistance at 1.0343, 1.0468 and 1.0591 as part of the active “layered” hedging strategy.

Buyers of USD/CAD should focus on support at 1.0038, 0.9922 and 0.9724 as part of a disciplined “layered” hedging strategy.

• A potential base-building process is underway in USD/CAD – with the daily and monthly resistance level at 1.0343 serving as a crucial pivot point.
• Daily and monthly closes above 1.0343 are now required in order resolve the current consolidative phase and to reaffirm the bullish thesis for USD/CAD.
• This outcome would argue for greater gains for USD/CAD – and provide manufacturers and exporters with a bit more “breathing room” for hedges.
• USD/CAD buyers will have to maintain a more aggressive stance.
• Support levels at 1.0038, 0.9922, 0.9724 and 0.9422 feature prominently in this regard.
• Medium and long-term resistance levels at 1.0343, 1.0468, 1.0591 and 1.0795.

3-month hedging strategies for Sellers of USD/CAD:

• Retracements to resistance at 1.0343, 1.0468 and 1.0591 will present an opportunity to sell USD/CAD over the next 3 months.
• A “layered” spot strategy is always recommended that incorporates multiple resistance levels – as it is difficult to pick the ultimate high for a price move. This strategy allows the hedger to “average in” to cover required exposures rather than hoping that prices reach one ultimate level against which the entire hedging requirement can be completed, only to miss the entire opportunity should the rally fall short.
• Alternatively, using a spot reference of 1.0085, you can consider the use of a knock-in tunnel option with a 3-month expiry. A 0.9715 CAD call would be purchased and a 1.0500 CAD put would be sold that knocks in at 1.0610 in order to generate a zero-cost structure. If USD/CAD were trading below 0.9715 at expiry, you would be able to exercise the CAD call and sell USD/CAD at 0.9715. Alternatively, if USD/CAD were to trade above 1.0610 anytime during the life of the option, the 1.0500 CAD put would knock in. Under this scenario, you would have to sell USD/CAD at 1.0500 if prices were above this level at expiry. Conversely, if prices do not trade above 1.0610 during the life of the option, you would have no obligation whatsoever and could sell your USD in the market.

3-month hedging strategies for Buyers of USD/CAD:

• Selloffs to nearby support at 1.0038 along with 0.9922 and 0.9724 will represent an opportunity to buy USD/CAD over the next 3 months based on the active “layered” approach.
• Alternatively, using a spot reference of 1.0085, you can consider the use of a mini-premium option with a 3-month expiry. A 1.0515 CAD put would be purchased for zero cost at inception based on a notional amount of $10 million. However, if trigger levels at 1.0025, 0.9915 and 0.9715 were to trade at any time during the life of the option, a payout of $47,000 would be charged for each respective trigger. Hence the structure would carry a maximum cost of $141,000 if all three levels were triggered. If none of the trigger levels are touched, you are left with a 1.0515 CAD put. Therefore, should USD/CAD trade above 1.0515 at expiry, the put would be exercised and you would buy USD/CAD at 1.0515. If spot were trading below 1.0515 at expiry, the option would not be exercised and you would be free to purchase USD/CAD at the prevailing market rate on July 7, 2008.
• As a comparative reference point for both option strategies, note that the 3-month forward outright rate to July 7, 2008 would be 1.0102 (using a spot reference of 1.0085 and a forward rate of 17 points).