U.S. dollar/Canadian dollar risk reversals flipped last week as the greenback appreciated against its Canadian counterpart and investors bet that, for the short-term at least, the dollar will remain strong. Twenty-five delta risk reversals shifted to 0.15 vol in favor of dollar calls/Canadian puts from 0.15 vol the other way around. The dollar rose to CAD1.585 Thursday from CAD1.56 Monday in New York.
A common trade was for investors to buy short-term dollar calls with strikes above parity, at levels such as CAD1.59 and higher. "A lot of people are buying dollar calls, they're nervous we may see a short squeeze that takes us back down the CAD1.50," said one trader in New York. He cautioned that the dollar's gains only appear to be short-term as traders are buying shorter-dated options. Implied volatility was unchanged for the week, with one-month vol static at 7.1%.
T.J. Marta, a foreign exchange strategist at Citigroup in New York, said the Canadian dollar is fundamentally stronger than where it is trading. However, short-term technical factors have led to the greenback's recent rise, he said, adding that so long as the U.S. economy remains weak, Canada's exports and currency will struggle. Longer-term, however, he said an expected pick up in the global economy and commodity prices should bode well for the Canadian dollar, leaving the bank very bullish on the currency. Citigroup's house view calls for the Canadian dollar to strengthen to CAD1.54 in one month and to CAD1.48 in six months.
USD/CAD Spot & One-Month Implied Volatility