Players were snapping up short-dated USD/CAD, GBP/CAD and CAD/Yen options last week as the Canadian dollar gained strength against most currencies. A delayed reaction to this month's Canadian election, high oil and natural gas prices and overall positive economic growth combined to push the Canadian dollar higher in the spot market and triggered general interest in buying at-the-money call options inside of three months.
The Canadian dollar Tuesday hit a 14-year high against the U.S. dollar in the spot market, closing at CAD1.1425 Tuesday after hitting a high of CAD1.14 after the U.S. Federal Reserve raised interest rates earlier in the day. That was up from CAD1.1556 last week and CAD1.1723 the week before. Three-month implied volatility climbed to 7.93% Tuesday from 7.74% last week and 7.56% a week earlier. Traders said activity was driven mostly by moves in oil and natural gas prices, but strategists said it had more to do with investors getting back into positions they'd closed before the election.
"Investors are using commodity currencies as a proxy to play the commodity market," said one trader. "It's hard to play the commodity market directly when it's this volatile. But CAD is moving in line with energy prices." In the medium to long term, high oil prices are bullish for Canada, agreed Greg Anderson, senior FX strategist at ABN AMRO in Chicago. "But that's a minor reason compared to investors going back to their core positions now that event risk is out of the way." Anderson added the outlook is bullish, noting that ABN expects the U.S. dollar to trade down to CAD1.10 in the next three to six months.
