I am starting to see opportunities for expressing divergence between the U.S. and Canada. While U.S. inflation beat handedly, Canada’s CPI and PPI data were both very weak. Core CPI at 2.4% is within the target range, and PPI is deeply negative.
The composite PMI is in the 46 range, with even services at very recessionary levels.
The only thing keeping the economy afloat, and CPI above target, has been housing due to the very expansive immigration policies.
However, even housing is starting to look shaky. Contrast the below housing price movements with the continued increase in housing prices in the U.S.
Interestingly, despite the much weaker economic backdrop, CAD rate cut pricing is very much the same as the U.S. First table is U.S. SOFR pricing, second is BA pricing.
It’s tempting to trade this divergence in rates. I am not going to because I still think USD rates have upside, and CAD rates are very tightly correlated at the moment. Thus, FX is the way to express this. With USDCAD vols so dirt cheap, I think expressing deep upside as a tail hedge makes sense.
I haven’t pulled the trigger yet, but am looking at CAD puts on futures, with an expiry of April 5th, with a put spread of 0.73/0.725 that corresponds to USDCAD 1.37/1.38 call spread. The put spread can be bought for 0.0005/contract, with a max value of 0.005, or 10:1. I may wait until Monday to avoid weekend theta since it is a short dated trade, but if I do execute I will post that in the comments below.
I bought the CAD May 3rd 0.715 put for 0.0006. I am looking for USDCAD to make a move to 1.375/1.38, and would monetize there for 3-5x cost. I like this is as a risk-off hedge.
if you wanna dabble in a macro rates expression check out CAD 2s30s cash curve vs the globe o.O