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BoC (Bank of Canada) monetary policy is scheduled for today, the policy expectations have firmed up in the past week or more and the LFS data added some incremental conviction for a hike on Jul 11th.
The breakdown (full time/part time) looked a little mixed but a breakdown of the breakdown (by sector) shows encouraging signs – a rebound in construction jobs and the first growth in manufacturing employment this year. Market pricing reflects around 87% of a 25bps hike priced in now.
This is an MPR meeting and there will be a press conference afterward; messaging around the rate outlook will therefore count.
The Governor recently noted clearly that given where the economy is, higher rates will be warranted so markets will want to assess where the policy risks lie over the balance of the year.
We anticipate a 25bps tightening next week and another later this year (to get to 1.75% for end 2018). Our end 2019 target is 2.50%.
Ahead of today’s Canadian bank’s monetary policy, let’s just glance through the risk reversals of USDCAD across all tenors that are showing no changes, while IV skews of 1m expiries still signal bullish hedging bids. The positively skewed IVs imply that the bullish risks remain intact despite the above stated fundamental factors.
The future volatility determines option pricing, yet it is impossible for any veteran in FX markets to anticipate accurate future volatility. Nevertheless, it is quite possible to ascertain the marketplace’s expected future volatility using the option’s price itself. This is known as implied volatility (IV) and, due to the nature of its calculation, it is theoretical. If IV is high, it means the market thinks the price has potential for large movement in either direction. Low IV implies the market reckons the price would not move much.
While 1m forward rates show negligible changes and bearish targets in the longer tenors.
Currency Strength Index: FxWirePro's hourly CAD spot index is displaying shy above 26 levels (mildly bullish), while hourly USD spot index was at 154 (highly bullish) while articulating (at 10:44 GMT). For more details on the index, please refer below weblink:
