FxWirePro: Snapshot on CAD OTC tools ahead of most likely BoC’s inaction

A number of key US data releases which were due today, including the ADP employment and ISM non-manufacturing reports, that have been moved to tomorrow due to the national day of mourning for former President George H. W. Bush. Fed Chairman Powell’s testimony to Congress has also been postponed to a date as yet unspecified.

But BoC’s monetary policy is the major news during US session. Well, there has been a consensus about the fact that the Bank of Canada (BoC) to maintain status quo in this policy leaving its key rate unchanged at 1.75%. First and foremost, it had just hiked its key rate by 25bp at its October meeting, and secondly uncertainty surrounding the economic and inflation outlook has increased since then which points towards a more cautious approach. 

Admittedly this is not a Canada-specific issue. Global economic concerns are currently generally dampening rate hike expectations, but the rapid fall of the oil price since early October is putting additional pressure on the Canadian economy. 

As a result, the market has priced another rate hike in January in at only 60% now. We remain slightly more optimistic regarding the economic and inflation momentum and still consider a rate step in early 2019 to be very likely. The downside potential in USDCAD is nonetheless limited as the BoC is unlikely to propose a much more aggressive approach than the Fed so as to not risk strong CAD appreciation – experience it gained in 2017 and that it is likely to have learnt its lesson from.

CAD OTC indications: 1M ATM IVs (implied volatilities) of USDCAD are trading in the range of 6.76% - 7.09%, skews are also suggesting the odds on OTM call strikes upto 1.35 levels at this juncture. While 1m EURCAD IVs have been well balanced on either side, indicating the risk sentiments are skewed for both bullish and bearish risks.

We could also notice fresh bids for 1w-1m risk reversals that signals both upside and downside risks respectively, and the bullish risk-neutral distribution of returns in the long-run. Also, the IV curve is at, or slightly decreasing, with maturity.

In general, it is reckoned that favouring optionality to directional trades likely to fetch desired results as we are inclined to position for unforeseen swings in both near and long terms, as calling the bottom is quite difficult and adding naked spot exposure is risky at the moment. Courtesy: commerzbank

Currency Strength Index: FxWirePro's hourly USD is inching towards -9 (which is absolutely neutral), hourly CAD is at -82 (bearish) while articulating (at 12:48 GMT). 

For more details on the index, please refer below weblink:http://www.fxwirepro.com/currencyindex