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USD/CAD, AUD/USD Volatility Soars on Federal Reserve Rate Decision Risk

USD/CAD, AUD/USD Volatility Soars on Federal Reserve Rate Decision Risk

Justin McQueen,

Currency Volatility AUD/USD, USD/CAD Talking Points

  • G10 FX Volatility Surges on Fed Day
  • AUD/USD Implied Volatility Highest in G10 amid Fed and Jobs data
  • Fed Expected to Cut Rates, Eyes on Talk of Open Market Operations Amid Liquidity Squeeze

Top 10 most volatile currency pairs and how to trade them

For a more in-depth analysis on FX, check out the Q3 FX Forecast

Most Volatile Currencies on Fed Day

AUD/USD | Daily Range 0.6785-0.6885

Overnight AUD/USD implied volatility has surged to its highest level since May as focus turns to the Federal Reserve rate decision, alongside the Australian jobs market report. Implied vols have added nearly 10 vols in risk premium to 15.95, which in turn means that AUD/USD ATM break-even straddles = 46pips(essentially, for option traders to realise gains, the spot price must see a move greater than 80pips).

Australian Labour Market

The importance of the labour market data has grown since the release of the dovish RBA minutes at the beginning of the week, which has seen rate expectations of a 25bps to 0.75% rise from 27% to 46%. Consequently, a rate cut at the October meeting could be somewhat of a material risk amid a weaker than expected labour market report.

USD/CAD | Daily Range 1.3190-1.3330

Overnight USD/CAD implied volatility has gained 5.35 vols to 12.55, marking its highest level since January. In light of the recent volatility across the oil complex, notable risk premium has been added to oil-sensitive currencies, in particular the Canadian Dollar. As such, the USD/CAD ATM break-even straddle = 69pips. Prior to the FOMC meeting, CAD traders will be placing a watchful eye on the latest inflation report, which in recent months have been holding relatively steady at the BoC’s target. As the BoC’s preferred inflation metric holding at the 2% target, it would take a notable deviation to prompt a rethink in the central banks neutral outlook.

Fed Monetary Policy Decision

The Federal Reserve monetary policy decision is scheduled for 19:00BST, where expectations are for the Fed to lower the fed funds rate by 25bps to 1.75-2.00% with two hawkish dissenters (George & Rosengren). However, with a cut largely priced in, eyes are on the outlook with regard to monetary policy and whether the central bank will leave the door open to further interest rate cuts. As a reminder, the latest staff economic projections are due to be released, in which the dot plot projections are likely to be guided lower in order to reflect the recent rate cuts.

Key Fed Commentary

Current Fed Staff Economic Projections

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at

Follow Justin on Twitter @JMcQueenFX

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