EUR/CAD was little changed after earlier swings, hovering near 1.6070 in early European trade on Friday. The cross faced potential downside as markets looked to softer Eurozone inflation, which could support a less restrictive European Central Bank stance. Eurozone core HICP is seen steady at 2.4% year on year and 0.2% month on month, while the headline HICP is forecast to fall 0.1% on the month.
Reuters reported the ECB is widely expected to leave rates unchanged next Thursday, though officials are anticipated to deliver a second rate rise of the year in September as higher energy prices revive concerns about more persistent inflation. The Canadian Dollar also drew support from expectations that oil markets may stabilise, as tensions between the United States and Iran raised the risk of Middle East supply disruptions. Reuters said Iran told Yemen’s Houthi militia to block the Red Sea route if US strikes hit Iranian power infrastructure, while Tasnim reported explosions in Bandar Abbas, Qeshm and Ahvaz, with separate blasts heard as far away as Kuwait and Basra.
Derivative Strategy For EUR/CAD Downside
We advise derivative traders to position for a downward move in the EUR/CAD cross, which is currently trading near the 1.6070 level. To capitalize on this expected decline over the coming weeks, we recommend buying EUR/CAD put options with a mid-August expiration. This strategy allows us to profit from a falling Euro while keeping our risk strictly limited.
Eurozone Weakness Versus Canadian Dollar Strength
We expect the Euro to face steady downward pressure because Eurozone headline inflation is projected to drop by 0.1% month-over-month. Although core inflation remains sticky at 2.4%, sluggish retail sales and slowing manufacturing PMI data across Europe suggest the economy is struggling. With the European Central Bank highly expected to hold rates steady next week, the currency lacks any strong upward drivers.
On the other side of the trade, we see the Canadian Dollar gaining strength as global oil prices surge toward $83 a barrel. Escalating military tensions in the Middle East, including threats to block the Red Sea shipping lanes, have pushed Brent crude up by nearly 3% this week alone. Since Canada is a major oil exporter, these high energy prices will continue to boost the Loonie.
To navigate this high-volatility environment, we suggest utilizing bear put spreads instead of buying outright puts. Implied volatility for EUR/CAD has risen recently, making options more expensive to buy. Using a spread helps us offset these premium costs while targeting a price drop toward the 1.5900 support level.
