FxWirePro: CAD best gamma performer versus G10 peers as BoC takes breathing space with new USMCA

The uncertainty about the future North American trade paradigm was damping Canadian investment in the recent past. In turn, the BoC reckoned to be restrained by NAFTA uncertainty in recent months. However, the Bank of Canada's (BoC) decision to raise interest rates this week was almost completely priced into the market and therefore not a big surprise. What is more interesting is what Stephen Poloz, the head of the central bank, said. Canadian central bank has hiked 25 bps to keep its interest rates at 1.75% in its yesterday’s monetary policy.

Well, the big indecisive aspect for the BoC was the NAFTA negotiations – which is off the table now, with the new USMCA agreement. This means that the BoC can rely increasingly on its forecasts. And the outlook for the domestic economy is, in its view, very good, as the upturn is based on a broad basis. 

The projections for investment and exports have been raised and private consumption is expected to remain very buoyant thanks to rising incomes. Wages are expected to rise gradually due to increasing capacity strains, according to business polls. The various measures of core inflation are in line with the inflation target of 2%, while the overall rate is slightly higher. 

According to the BoC, even after the rate hike to 1.75%, monetary policy remains clearly stimulative as the real interest rate remains negative. 

CAD-crosses are the strongest performers in G10 gamma at present, thanks in large part to swings in oil prices: WTI 1m realized vol has climbed from 19 to 27 over the past month, and price swings can sustain in coming weeks in the lead-up to the Iranian sanctions coming online in early November. 

Interestingly, MXN- crosses are not performing despite the peso’s oil linkages, caught perhaps between oil and NAAFTA relief on the one hand and a generally stressed EM environment on the other. 

CADMXN (or a mix of USDCAD and CADMXN) vs USDMXN is a reasonable gamma RV with recent realized vols running 1.0 - 1.5 % pts. over implieds. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly CAD is flashing at 75 (bullish), while hourly USD is flashing at -14 (neutral), while articulating at 13:24 GMT. For more details on the index, please refer below weblink:

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