The Canadian dollar continued to weaken against the greenback last week, hitting roughly CAD1.2382 Wednesday from CAD1.1847 at the start of the month. Implied volatility moved higher and created greater demand for short-dated options in the face of limited supply. "If someone came in and sold USD500 million one-month options, that would be what the market needs to calm it down," said Andrew Chaveriat, a currency analyst with BNP Paribas in New York.
One-month implied volatility on the Canadian dollar now stands at 9.7% compared to 8.9% at the start of the month. The steady rise in volatility kicked off in November when the Canadian government released worse than expected unemployment data, explained Kay Mirza, head of fx options trading at JPMorgan in New York. In addition, recent news of above-normal temperatures expected in the northeastern U.S. for year end led to an energy price sell-off, he said.
Investors want to buy short-dated options, mostly for one and three month maturities, because they can trade the underlying against the option, Chaveriat said. Traders want to own the options because they want to capture the changes in spot. "If we keep seeing the spot move, [volatility] could get up to 10% for one-month," he noted.
Mirza said, "I actually think the markets will remain volatile going into 2005." Chaveriat hopes he's right. "You want volatility," Chaveriat said.
