Canadian Dollar Outlook Hinges On Inflation, BOC Rate Cut Odds

The Canadian Dollar will likely take the spotlight during Wednesday’s trading session in light of the high-impact event risk surrounding the Loonie. CAD price could get a serious jolt from Canada inflation readings for October due tomorrow at 13:30 GMT, which carries the potential of materially swaying Bank of Canada (BOC) interest rate cut expectations and follows last week’s dismal jobs report and housing data release. As such, overnight implied volatility measures for major Canadian Dollar currency pairs have ticked higher headed into the Canadian inflation report release.

CANADIAN DOLLAR IMPLIED VOLATILITY & TRADING RANGES (OVERNIGHT)

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Canadian Dollar Implied Volatility USDCAD CADJPY EURCAD GPBCAD AUDCAD

USD/CAD overnight implied volatility jumped to 5.6% from the prior day’s reading of 3.9%. This compares to the 20-day average of 4.2%. CAD/JPY is expected to be the most volatile Canadian Dollar currency pair with an overnight implied volatility of 7.9%, but this ranks in the bottom 40th percentile of readings taken over the last 12-months despite being slightly above its 20-day average reading of 7.3%. Options-implied trading ranges are calculated using 1-standard deviation (i.e. 68% statistical probability price action is contained within the implied trading range over the specified time frame).

CANADIAN DOLLAR RISK REVERSALS (OVERNIGHT)

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Canadian Dollar Implied Volatility USDCAD CADJPY EURCAD GBPCAD AUDCAD

Broadly speaking, forex options traders appear to have a bearish bias toward CAD price action ahead of the Canadian inflation report according to overnight Canadian Dollar risk reversal readings. Moreover, bearishness toward the Canadian Dollar seems to be gaining pace judging by the trend and changes in overnight CAD risk reversals.

A risk reversal reading above zero indicates that the demand for call option volatility (upside protection) exceeds that of put option volatility (downside protection). 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.

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