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Implied Volatility – Talking Points:

  • CAD traders eye upcoming event risk with a focus on Bank of Canada’s interest rate decision expected tomorrow
  • Currency option traders continue to price in higher anticipated price swings across EUR, GBP, AUD and NZD forex pairs
  • Looking to refine your trading skills? Check out the DailyFX Top Trading Lessons here!

USDCAD 1-Week implied volatility remains elevated as currency traders anxiously await the Bank of Canada’s interest rate decision on deck for 15:00 GMT tomorrow. Although the central bank is widely expected to keep its policy rate unchanged at 1.75 percent, follow-up commentary provided from BOC’s Governor Stephen Poloz will likely provide markets with an update on Canada’s economy and future policy outlook.


USDCAD 1-Week Implied Volatility at Highest Level Since JanuaryUSDCAD 1-Week Implied Volatility at Highest Level Since January

Implied volatility on 1-Day and 1-Week currency options contracts has steadily crept higher in recent days. USDCAD implied volatility has been moving higher over the last 5 trading days with currency option hedging costs rising from 5.93 percent last Tuesday to 7.04 percent today. AUDUSD and NZDUSD also look to experience some price volatility as markets digest China’s weak economic growth estimates released this morning.


USDCAD 1-Week Implied Volatility at Highest Level Since January

Recent USD strength on the back of relatively upbeat economic data has pushed the USDCAD higher as indicated on the chart above. Spot prices rebounded aggressively off uptrend support and the 61.8 percent Fibonacci retracement level yesterday but have remained range-bound between the 1.310 and 1.336 handles since the start of the year.

Despite near-term resistance at the 78.6 Fibonacci retracement line, the currency pair may break out above this price ceiling judging by USDCAD trading ranges derived from by implied volatility. BOC remarks that are more dovish than expected could serve as a fundamental driver for a topside breakout.


USDCAD 1-Week Implied Volatility at Highest Level Since January

Take a look at IG’s real-time Client Sentiment tracker to see the bullish and bearish biases of traders on other forex markets.

USDCAD traders have grown increasingly bearish on the currency pair ahead of the BOC’s rate decision with the number of traders net-long falling 7.6 percent while the number of traders net-short jumped 20.7 percent higher compared to last week. This has resulted in a short-to-long ratio of 1.41.


Written by Rich Dvorak, Junior Analyst for DailyFX

Follow on Twitter @RichDvorakFX

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