Traders snapped up short-dated Canadian dollar calls/U.S. dollar puts last Tuesday after the Canadian's sharp gain against the greenback in the spot market caught them by surprise. The Canadian dollar bumped against the greenback to CAD1.2541 Tuesday from CAD1.2622 the Friday before. Players were buying calls slightly out-of-the-money at CAD1.24. One-month implied volatility on the currency pair spiked to 7.6% from 7.37%. "The [U.S.] dollar is weakening and that's why vols are going up and U.S. dollar puts are becoming more bid," the trader explained.
John Rothfield, a senior currency strategist with Bank of America in San Francisco, referred to the Canadian dollar as an "out-performer" and said investors sought to go long the currency for several reasons. First, fairly good economic numbers have been coming out of Canada, such as Tuesday's news of a 2.3% annualized GDP growth in the first quarter. Second, prices for oil, a major Canadian export, edged higher. Last, Canadian dollar performance is linked to the Aussie and New Zealand dollars because all three have significant commodity exports, and Australian and New Zealand released weak economic data last week. "That encouraged people to buy Canadian at the expense of Aussie and New Zealand dollars," he said.
The Canadian dollar has been moving higher against all other currencies lately, said Kay Mirza, managing director and fx options trader at JPMorgan in New York, adding it only last week appreciated against the greenback. He said this was because the strengthening Canadian currency was overshadowed by a similar rise in the U.S. dollar last month. Rothfield added, "People don't think today's [Canadian] strengthening is going to break us out of major ranges." He described the Canadian dollar's strengthening as an adjustment, adding, "It's not a landmark day."
