Economic events: Canadian GDP likely to have expanded and trade deficit to contract

Canadian economic data of recent hasn’t been very positive, MoM consensus are at 0.5% from the previous -0.6%, this would mean that the Canadian gross domestic product figures may indicate the economy contracted in Q2.

Given the previous economic backdrop, BoC maintained monetary policy unchanged at 0.5%. Central Bank to continue to pushing competitive weakness into their currency in order to keep trade flows afloat.

While Canadian Canada's merchandise trade deficit came in at CAD 3.63 billion in June 2016 compared to a revised CAD 3.50 billion gap in the previous month, missing market consensus.

As the Canadian currency has continued to be bolstered since beginning of 2016, this has ended exports into less competitive within the current backdrop of near-unanimous dovish Central Banks (FOMC the notable exception); and this has made to squash Canadian exports at a record clip in the early portion of this year.

Continued lag in exports may force the Bank of Canada’s hand before results of Trudeau’s stimulus might begin to show. But for the July month, the consensus stays to have contracted trade deficit flashes.

On the flip side, Australian building permits are scheduled to be announced today that is likely to be increased from previous -2.9% to 1.2%. While the capital expenditure in Australia is scheduled on Thursday, this economic number has been poor and would give an estimate of Australia’s actual investment in Q2 and an update on companies’ plans of investment for 2016-2017.

The focus would be on the prospect of non-mining business investment, where a small improvement is expected. 

AUD/CAD represents stagnant Vega in OTM strikes despite mild IVs

In the short term, given the expectation of unchanged policy stance, AUDCAD spot FX is likely to remain in the range of 0.9955 on north or 0.9812 on the south but currently a little bias towards downward targets.

Despite the significant economic flashes as stated above, we see no notable activities in OTC FX of this pair. IVs of 1W ATM contracts are stagnantly creeping up from current 8.93% to 10.12% of 1w expiries.

This is because a small change in IV will make no difference on the likelihood of an option far out-of-the-money expiring ITM or on the likelihood of an option far into-the-money not expiring ITM.

ATM options are far more sensitive since higher IVs greatly increase their chances of expiring ITM.