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It is reckoned that the USDCAD IVs seem to be blowing out of the proportion ahead of BoC’s monetary policy which is likely to maintain status quo on its O/N rate in our opinion. But, Fed during Christmas will have more driving forces on USDCAD.
This has been evident if you have to observe the combination 1w/1m/3m IVs patterns that are able to produce more positive flashes in ATM volatilities in longer tenors. Hence, what we are seeing in 1w buzzing vols are deemed as momentary.
The analysts agree that the Bank of Canada (BoC) will leave its key rate unchanged at 1% today; after it already took far-reaching steps by implementing two rate hikes within a short space of time. CAD had appreciated notably as a result of the steps and therefore BoC governor Stephen Poloz most recently felt obliged to limit rate expectations on the market. He pointed out that the central bank was not pursuing a pre-determined rate path but that each rate decision depended on the data.
In this context, he mentioned the uncertainty relating to inflation developments. Since mid-2016 price pressure has weakened considerably. While most recently inflation has risen again slightly, it still remains in the lower half of the BoC’s target corridor of 1-3%.
Moreover, the economic outlook is being dampened by the NAFTA negotiations. Due to the strict demands on the US side, the negotiations have been quite difficult recently so that the risk of one of the parties withdrawing from the free trade agreement has risen.
In our view, it would make sense for the BoC to at least wait for the Fed’s next rate step before hiking interest rates further so as to prevent a renewed strong appreciation of CAD against USD.
Currency Strength Index: FxWirePro's hourly USD spot index is flashing negative 26 (which is bearish), while hourly CAD spot index is gaining traction ahead of BoC was at a tad below 61 (bullish) at 12:31 GMT. For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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