The cost of U.S. dollar/Canadian dollar options rose and risk reversals flipped last week amid strong buying interest in greenback puts/Canadian dollar calls. Foreign exchange options traders said vol rocketed because a firm, whom they declined to name, bought nearly a yard of one-month U.S. dollar puts struck at CAD1.57, likely for a client. Spot was at CAD1.5780 late Wednesday in New York, down from as high as CAD1.59 earlier in the week. One-month implied volatility rose to 9.6% after the buying action Wednesday from 8.8% Monday. Traders expected spot to move even lower, as 25-delta risk reversals flipped to 0.2 vol in favor of dollar puts/Canadian dollar calls, from 0.1 vol in favor of dollar calls/Canadian dollar puts on Tuesday.
The Canadian dollar should continue to gain on its southern neighbor, but those gains will not be significant with commodity prices low due to the lack of global economic growth, said Michael Rosenberg, managing director and global head of fx research at Deutsche Bank in New York. However, he noted that short-term Canadian yields are now 100 basis points above those in the U.S. and the gap could rise by another 25-50bps if the Federal Reserve cuts rates to stimulate the U.S. economy. He said the sharp move in spot also played a role in rising volatility. "We think the Canadian dollar is a buy, but you're not going to get rich on it, the kind of [yield] widening we're expecting is just not that significant," he said. Deutsche Bank's house view calls for the Canadian dollar to strengthen to a range of CAD1.52-1.55 by year-end, with a bias toward the higher end.
USD/CAD Spot & One-Month Implied Volatility
