CAD/USD volatility continues as Canadian and U.S. monetary policy diverges
Summary
CAD and USD have been among the most volatile global currency pairs in recent weeks.
Gyrations of the USD against other major currencies typically cause major movements in the market (usually the risk on/risk off trade) and CAD being swept along on the cross rates. Recently, a divergence in policy between the Bank of Canada (BoC) and the Fed has led to an increased influence over the CAD.
Prior to the collapse of Silicon Valley Bank (SVB), the market expected the U.S. Federal Open Market Committee (FOMC) to increase interest rates by 50 basis points on the back of the strong March U.S. non-farm payrolls number. Simultaneously, after a 400-bps tightening in the Canadian overnight rate (CORRA) by the BoC in 2022, they chose to pause their tightening program on March 8. This move reflected the BoC’s statement made in December 2022 that their decisions moving forward would be “data-dependent.” At that point, USD/CAD rallied to 1.3862 on the expectation the spread between U.S. and Canadian rates would widen. This was a full two-big-figure move for the day and six big figures off its November 2022 levels.
Two days later, on March 10, the SVB collapse sideswiped the market as it became apparent to many that the Fed would change its tune. With the expectation of a 50-bps Fed rate hike looking improbable, USD/CAD no longer had the support of the policy divergence and sold off to 1.3650. The continuing “risk-on” theme resulted in a decline to 1.3300 by mid-April.
Given this market uncertainty, volatility continues in this currency pair. For example, on April 12, the BoC left its overnight policy rate of 4.50% unchanged for the second time, further highlighting policy divergence and pushing USD/CAD from 1.3300 back to 1.3450. This theme continued through April with the “Loonie” cross peaking at 1.3650. All of this, in addition to option volatilities trending lower, provides a compelling case for exploring hedging alternatives.
Subscribe for weekly updates on market rates and forward curves.
Conclusion
If you have questions about Canadian market volatility or its impact on your financial statement exposures, please reach out. Chatham Financial has a global reach and expertise in numerous FX underlyings, helping our clients navigate these markets, assisting in designing strategy, formulating FX policies, and ensuring at-market pricing at execution.
FX Rates
Chatham executes over $4 billion hedged notional per business day and has deep expertise and experience in trading even the most remote currency pairs. From spot transactions to complex hedging strategies, Chatham can assist in your desire for foreign exchange market transparency.
Americas
|
Loading rates... |
Europe
|
Loading rates... |
Informational Purposes Only - Disclaimer | Forex Data by Xignite
Disclaimers
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.
23-0102
