Short term
Trade view / 22 June 2016 at 14:03 GMT

GBPCAD may be a rewarding Brexit option

FX Consultant / IFXA Ltd
Canada
Instrument: GBPCAD
Price target:
Market price:
Background

The UK referendum on EU membership comes up tomorrow and at this point, various polls suggest that Remain has a slim lead. UK bookmaker Ladbrokes predicts a 76% chance that Remain will prevail. 

Consequently, GBPUSD and GBPCAD have recouped the losses incurred in June, when the Leave side was leading in the polls.  

The GBPCAD downtrend from January remains intact while trading below 1.9000 which is guarding the 38.2% Fibonacci retracement level of the January-June range. A break below 1.8670 would suggest further downside and reduce the risk of the option expiring in the money.

The intraday and short-term GBPCAD technicals are bearish and this week’s rebound in prices implies that if GBPCAD rallies post-referendum, topside gains will be limited. 

It also implies that the risk/reward favours the downside.

Selling a two-day GBPCAD Call option may be a good vehicle to express this view.

Management and risk description 

This trade is a loser if GBPCAD is higher than 1.9200 at expiry at 10:00 am EDT (New York cut). In the event of a Remain victory, GBPCAD should rally.  

The naked 1.9050 exposure will need to be managed to preserve the premium and/or mitigate losses if the initial post-referendum spike is higher than 1.9200.  

Note: Your losses are theoretically unlimited above 1.9200 so you must monitor this trade.

Parameters

Entry: sell GBPCAD Call option, Strike 1.9050, expiry 24Jun16, (NY cut) and earn .0150 points

Performance: if GBPCAD is above 1.9050 at expiry, you are obligated to sell GBPCAD at 1.9050; if GBPCAD is below 1.9050 at expry, the option expires worthless and you keep the premium (0.0150 points)

GBPCAD spot reference: 1.8750.

Time horizon: close 1000 EST, Friday June 24

GBPCAD hourly with resistance and strike prices highlighted:
gbpcad
Source: Saxo Bank 

GBPCAD daily with Fibonacci retracement levels:
gbpcad
Source: Saxo Bank 

GBPCAD five-year daily with moving averages:
gbpcad

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Source: Saxo Bank

— Edited by Michael McKenna

For more on forex click here.

Non-independent investment research disclaimer applies. Read more
22 June
assi assi
Hi Michael, do you think to go long USDCAD is a good idea...?
22 June
Michael O'Neill Michael O'Neill
Not particularly. Usdcad is close to the middle of the range. I think it's a better buy closer to 1.2600
22 June
Philidor Philidor
Hi Michael. Do you know if the results are ticking in, or is it one announcement only?
22 June
fxtime fxtime
I believe the vote count will work along the same lines as an election vote count and a county by county release of data as and when it is completed will be released throughout the evening so expect some knee jerk reactions until a consensus establishes.
22 June
Michael O'Neill Michael O'Neill
Thanks FX time. I had no idea
22 June
Philidor Philidor
So for this trade, we have to count on that no pre-result spike reaches 1.92 which could potentially, in an evil world, trigger a buy order to enter a fateful spot position...
22 June
Michael O'Neill Michael O'Neill
Yup that is the deal.
22 June
Michael O'Neill Michael O'Neill
It makes the vote interesting while providing a cushion from current spot.
22 June
Philidor Philidor
Ok! I've chosen to completely cover my spot positions with options, just in case. Maybe I'm paranoid :-) I have spot towards remain, covered, and a big out-of-the money option that should be very profitable in case of a leave. I also managed to take some profit and ensure a net gain in any event, during the gbp lows amid uncertainty last week, so I'm very happy with my position.

Good luck to everyone!
22 June
Philidor Philidor
I chose GBPJPY, by the way. The option prices seemed more reasonable given the extra "haven" potential. They were - they aren't anymore.
22 June
Michael O'Neill Michael O'Neill
Good luck.
22 June
fxtime fxtime
I quite like the gbpjpy nad gbpcad idea(s) but wonder if eurjpy offers a greater return? The way the marketplace is just now it is anyones guess sadly.
22 June
fxtime fxtime
sorry typos....nad = and ....I will have to learn to spell these big words :-)
22 June
Michael O'Neill Michael O'Neill
A little bit in GBPJPY spread and a little bit in GBPCAD-why not?
22 June
Michael O'Neill Michael O'Neill
ugh! I expected GBPCAD to be fairly tame ahead of the vote. I didn't see this GBPUSD short squeeze happening.
23 June
Clare MacCarthy Clare MacCarthy
Philidor, it should go like this: The first partial results from small constituencies should arrive shortly after midnight tonight and the full final result at "around breakfast time" on Friday, according to the UK’s Electoral Commission. However, a big chunk of the country's 382 local counting stations are scheduled to declare between 0200 GMT and 0300 GMT so we may have a clear idea of which way the axe will fall around that time.
23 June
fxtime fxtime
Mike...the eurjpy trade I suggested LOL although I opened a gbpjpy as you both mentioned too :-)
I suspect gbpcad will move the same as the other too late this afternoon.
23 June
Michael O'Neill Michael O'Neill
Nice play on eurjpy, fx time. hedging the gbpcad option is far more work than I wanted
24 June
Michael O'Neill Michael O'Neill
CLOSED: The GBPCAD Call option, Strike 1.9050, expiry 24Jun16, (NY cut) that generated .0150 points points premium was closed.

The trade earned a 0.0101 point profit

The contract was closed at 0047 GMT (7:47 pm EDT at a spot price of 1.8692
24 June
Philidor Philidor
This is intense! I'm literally on the edge of my seat, and I don't even plan to execute any orders during this thing.
24 June
Michael O'Neill Michael O'Neill
This takes me back to October 1995 during the Quebec referendum. For the record, the "eave side in that vote had the early lead which ended in a loss. Stay in Canada 50.5 vs. Leave 49.5 ( I forget the name of the actual sides

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