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Canadian Dollar at Risk Ahead of CPI: USD/CAD, CAD/JPY, GBP/CAD

Canadian Dollar at Risk Ahead of CPI: USD/CAD, CAD/JPY, GBP/CAD

2019-10-15 18:30:00
Rich Dvorak, Analyst
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CANADIAN DOLLAR PRICE OUTLOOK: CPI REPORT ON DECK HIGHLIGHTS USD/CAD, CAD/JPY & GBP/CAD

  • Canadian inflation figures slated for release during Wednesday’s trading session brings spot USD/CAD, CAD/JPY and GBP/CAD price action into focus
  • The Canadian Dollar could rise if CPI data underscores firming inflation and the relatively hawkish position of the Bank of Canada
  • Enhance your market knowledge with our free Forecasts & Trading Guides

The Bank of Canada (BOC) has left its policy interest rate unchanged at 1.75% for a year now and places it in the lonely camp of last-standing hawkish central banks. Yet the BOC’s benchmark interest rate is unlikely to change anytime soon and upcoming Canadian inflation data due Wednesday at 12:30 GMT stands to underscore the firm monetary policy stance communicated by Governor Poloz.

I noted in my Canadian Dollar Price Outlook published late last week that the 3-month average change in Canadian employment has potential to serve as a precursor to where the Canada CPI figures – and BOC policy interest rates – head next. Markets are expecting the headline CPI figure to cross the wires at 2.1% for September, which would be a 0.2% increase from the prior month’s reading.

CANADIAN INFLATION: TOTAL CPI & TRIM CPI (MONTHLY, YEAR-OVER-YEAR)

Canadian Inflation Canada CPI Chart of Historical Data

The Bank of Canada’s preferred measure of inflation – CPI Trim – excludes volatile components of the total CPI measure and has held at or above the central bank’s 2% symmetric inflation target since January. Correspondingly, another CPI datapoint that underscores firming Canadian inflation likely provides the BOC with additional evidence that supports the central bank’s string of hawkish holds over the last several policy meetings.

BANK OF CANADA (BOC) INTEREST RATE CHANGE PROBABILITIES (JANUARY 2020)

BOC Bank of Canada Interest Rate Cut Probability

The probability that the Bank of Canada cuts interest rates over the near-term has plummeted over the last several weeks. Overnight swaps pricing for the BOC to stand pat on rates through January 2020 most recently spiked to 77.7%, which is up significantly from the 45.2% probability priced by rate traders on October 10 prior to the latest blockbuster Canadian Jobs report. This trend stands to continue if upcoming CPI data reveals that inflation in Canada remains on target with the BOC’s symmetric 2% goal and would likely provide a positive tailwind for Canadian Dollar price action.

CANADIAN DOLLAR IMPLIED VOLATILITY & TRADING RANGES (OVERNIGHT)

Canadian Dollar USDCAD EURCAD GBPCAD CADJPY AUDCAD Implied Volatility Trading Ranges

GBP/CAD is expected to be the most volatile Canadian Dollar currency pair during Wednesday’s trading session with an overnight implied volatility of 18.67%, which is the highest reading since June 2017, as the UK inches closer toward reaching a Brexit deal. Also, CAD/JPY overnight implied volatility of 9.51% is elevated ahead of the Canadian inflation data release tomorrow and compares to its 12-month average reading of 8.71%. USD/CAD overnight implied volatility of 6.20% is above its 12-month average reading of 5.41%. Implied trading ranges are calculated with a 68% statistical probability and indicates a 1-standard deviation move from spot estimated with the latest overnight implied volatility reading.

CANADIAN DOLLAR RISK REVERSALS (OVERNIGHT)

Canadian Dollar Risk Reversal USDCAD CADJPY GBPCAD Ahead of Canada CPI Data

Although overnight Canadian Dollar risk reversals (skew) indicate that forex options traders have a bearish bias toward the loonie on balance headed into Wednesday’s trading session, skew measures are relatively less bearish than they have been recently. A risk reversal reading above zero indicates that the demand for call option volatility (upside protection) exceeds that of put option volatility (downside protection).

This brings to focus CAD/JPY whose overnight risk reversal ranks in the top 86th percentile of readings over the last 12-moths. This is particularly noteworthy considering JPY crosses are particularly sensitive to changes in interest rate expectations. As such, there is indication that the Canadian Dollar faces an upside risk – particularly against its Japanese Yen counterpart – if inflation data crosses the wires in-line or above consensus estimates.

For additional insight on market positioning and bullish or bearish biases, traders can turn to the IG Client Sentiment data, which is updated in real-time and covers several currency pairs, commodities, and equity indices.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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