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CANADA: JPM Initiate CAD/JPY 6m Put Spread

CANADA
  • JPM recommend a CAD/JPY ATM/25D 6m put spread. K = 102.97 / 97.68. Spot ref 105.20. Cost 156bps.
  • “We have renewed confidence in CAD underperformance. Our short bias on CAD in 1H’24 was largely predicated on Canada’s relative progress on disinflation. Yet we moved to the sidelines tactically early in the summer after the BoC first cut, reflecting the mature narrative on disinflation, a depressed terminal rate and a striking degree of short-CAD positions in the market.”
  • “That’s now changing”. Traditional positioning indicators suggest that “those positions have been cut significantly, perhaps by around two-thirds” whilst US-CA yield spreads “are also now well off of highs”.
  • “We still see the BoC cutting by 25bp per meeting into next year, but risks for a faster and deeper easing cycle remain elevated.”
  • “CAD/JPY shorts offer medium-term value if USD/JPY continues lower. CA has the highest beta to the US unemployment rate over the last few years. […] Considering the spot gap vs. CA-JP forwards and elevated entry levels from a medium/long-term perspective, CAD/JPY is a clear candidate for trading further NorthAm labor market weakening given valuations” 
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