cad

Canadian Dollar: Options Markets Show Clear Risk of USDCAD Rallies

Canadian Dollar: Options Markets Show Clear Risk of USDCAD Rallies

Fundamental Forecast for Canadian Dollar: Bearish

-    Canadian Unemployment unexpectedly rises
-    Canadian Dollar outperforms on buoyant risk appetite
-    View our monthly US Dollar/Canadian Dollar Exchange Rate Forecast

The Canadian Dollar finished the week modestly higher against its US namesake, but a sharp end-of-week reversal suggests near-term momentum favors further Loonie pullbacks. Sharply disappointing Canadian Net Change in Employment numbers forced a substantive turn lower in the domestic currency, and the USDCAD quickly broke above its 50-day Simple Moving Average through the close. A comparatively light economic calendar in the week ahead suggests that there will be little event-driven volatility for the North American currency pair. Yet the Canadian Dollar’s near record-high correlation to Crude Oil and other key financial assets suggest we may see yet another eventful week of USDCAD trading.
 

Foreseeable economic event risk will be limited to an start-of-week Housing Starts report and an end-of-week International Merchandise Trade release—hardly the recipe for major volatility. Yet FX options markets continue to price in considerable moves in the Canadian Dollar as broader financial asset classes remain especially active. Options trader sentiment on the Canadian currency is currently near its most bearish in eight months, while recent CFTC COT Futures data shows that speculative traders remain aggressively net-long. We believe that such a divergence leaves clear risk that Futures traders will cover Canadian Dollar-long positions—thereby forcing noteworthy CAD losses. All else remaining equal, over-extended positioning leaves less room for rallies and higher risk of pullback. As such, we remain medium-term bearish the Canadian Dollar (bullish the USDCAD). - DR

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