U.S. Treasury Yields Expected to Decline Amid Cooling Economic Pressures 
BOJ Raises Interest Rates to 31-Year High, Signals Strong Focus on Inflation Risks 
Denmark Central Bank Intervenes to Support Krone Peg Against Euro 
Supreme Court Backs Lisa Cook, Defends Federal Reserve Independence Against Trump Firing Attempt 
AI can be a personal trainer in your pocket – but is it safe? 
S&P 500 Relies on Tech for Growth in Q4 2024, Says Barclays 
Oil Prices Dip Slightly Amid Focus on Russian Sanctions and U.S. Inflation Data 
Indonesia Surprises Markets with Interest Rate Cut Amid Currency Pressure 
In a rebuke to Trump, the Supreme Court rules that birthright citizenship is the law of the land 
Goldman Predicts 50% Odds of 10% U.S. Tariff on Copper by Q1 Close 
Morgan Stanley Names BAE Systems Top European Defence Stock Despite Lower Price Target 
Wall Street Analysts Weigh in on Latest NFP Data 
BoE Policymaker Alan Taylor Signals No Need for Interest Rate Hike Amid Iran War Inflation Risks 
ECB Set to Raise Interest Rates as Energy Shock Fuels Eurozone Inflation Concerns 
The Bank of Canada has been signaling an imminent rate hike, if not in the July meeting then in September, and this is now priced in. The BoC is giving greater prominence to financial stability concerns stemming from high Canadian household indebtedness and regional housing booms. Although our early 2018 target for USDCAD has been reached, the loonie’s undervaluation should support further appreciation in the months ahead.
Only a handful of the analysts polled by Bloomberg expect a further Bank of Canada (BoC) rate hike today. All others, us included, believe that it will leave its key rate unchanged at 0.75%. The market reaction to the rate decision is going to be more pronounced than analysts’ forecasts suggest, as the market is pricing in a rate hike with a much higher probability (above 40%). So if the BoC was to leave everything unchanged today, CAD is likely to ease notably and is trading almost 6% above the level assumed by the BoC. Excessively aggressive rate hikes would risk an overshooting of the exchange rate.
In the recent times, CAD vols skews destabilized too much especially on crude’s price sustainability, while USD volatility market normalized sharply (you could observe that in USDCAD IV skews) which has been well balanced on both the sides. The liquidity recovered and the extreme positioning was ultimately absorbed. The price action is not taking the direction of an imminent new trend. As a result, the options market aggressively unwound smile positions.
While the implied volatility remains among the three lowest G10 vols, seeming options globally inexpensive. Despite the recent CAD appreciation, the USDCAD realized volatility has remained muted due to the low realized vol environment which makes knock-out barriers attractive.
Two-month USDCAD absolute moves observed on a daily basis since 2013 has been 88% smaller than the current distance between the spot and the KO barrier (690 pips). This makes the KO event unlikely. Risks are limited to the extent of premium. If USDCAD spot hits the 1.23 barrier at any time before the 2m expiry, the option will expire instantly. Hence, USDCAD 2m put strike 1.27, knock-out 1.23 (at spot ref: 1.2380).
