The extent to which the CAD volatility curve has flattened already today is a signal of how ‘hairy’ price action in the currency could be later around the 0830 CPI data. For the first time in a while, we really do think that the direction in USDCAD into the weekend is a ‘coin toss’. We are confident that 1.100-1.105 in the pair is where participants should and will look to position for more medium-term CAD downside. However, the spike in front-month volatilities this morning suggests the market is nervous about what the consequences of better data are. Importantly, this nervousness has been heavily compounded by two things. First, some CAD shorts have been covered this morning in London, possibly as a means of funding losses in other trades related to the EM rout. Basically, ‘risk positions’ have been cleared out. Second, the EM rout is doing a number on positions across the board, from US rates, to equities, to USDJPY. These squeezes are weighing on USDCAD, since so much of the USDCAD strength has been based on favourable USD yield spreads and the Fed ‘taper’.
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BMO