Canadian Dollar FX Options Talking Points:
- The Canadian Dollar[1] is priced in for the most intense price action since the 2016 US election
- Given recent news, the Bank of Canada may send the currency lower at their rate decision
- USD/CAD[2] is sitting on 2016 resistance amidst reversal warning signs, which will prevail?
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Amidst aggressive risk aversion in the markets on Italian political jitters[4], more intense price action for the Canadian Dollar seems ahead as USD/CAD stands at a critical junction point. Looking at the chart below, USD/CAD 1-day implied volatility is not only the most compared to its major peers, but it is also at its highest since November 8th, 2016 (the day of the US Presidential election). The similar 1-week reading is also elevated and at its highest since March.
Implied Volatility and Market Range for the FX Majors
Taking a glance at the economic calendar, the markets are bracing for Wednesday’s Bank of Canada monetary policy announcement. However, rates are anticipated to remain unchanged at 1.25% and what will be more interesting is their forward guidance. In regards to this aspect, there could be room for some disappointment in rate hike expectations.
Overnight index swaps are pricing in an almost 90 percent probability that the central bank will increase its main lending rate at least once by the end of the year. But there have been some recent developments that could encourage the BoC to err on the side of caution, sending the Canadian Dollar lower against
