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Macro and Vol Commentary

USDCAD is consolidated in a wide range of 1.26-1.30, but the market has pushed towards 1.25 as central banks tighten policy. What will happen next?

Economic Data

  • Canada's manufacturing data reached 56.6 in February, an improvement on the month prior. Output, new orders, and employment increased faster than in the previous month.
    • New orders rallied due to new product launches and stronger demand from the reduction of COVID restrictions.
    • Shipping delays, material shortages, and transportation conditions are causing headwinds to the market.
    • Inflationary pressures continue to increase, but firms remain upbeat about the next 12 months.
  • GDP growth was flat in December on an M/M basis but was up 3.9% Y/Y in December, fractionally higher than the month prior.
    • Annualised data shows growth for Q4 at 6.7%, up from a revised 5.5% the quarter before.
    • We expect growth to be marginally down in Q1 2022 as the economy benefits from reduced COVID restrictions. However, we expect growth to fall sharply in Q2 2022 as inflationary pressures and weaker consumer sentiment pulls through.
    • The Bank of Canada is forecasting growth to reach 4% in 2022 and 3.5% in 2023, which is a downside to both numbers.
  • The labour market continues to improve, with the unemployment rate declining to 5.5% as of February 2022, down from 6.2% in January.
    • Labour productivity declined in Q4 by -0.5%.
    • The participation rate is also improving and stands at 65.4%, up from 65.2%. We expect this to improve in the near term as the economy recovers well.
    • The hourly wage rate is rising but not at the same rate as inflation. Hourly wages for permanent workers increased by 3.3% in February.
    • Household savings during COVID will help offset some higher living costs, with Deloitte suggesting savings reached $79bn, and this number will return to normal in 2023.
    • The consumer shift towards services away from goods will benefit employment in the services sector, marginally boosting the economy through a positive multiplier.
  • Retail sales are growing on an M/M basis at 3.2%, with ex-auto at 2.5% M/M. In our opinion, retail sales growth will struggle as living costs continue to increase quickly due to the commodity price rises.
    • Durable and non-durable good sales will not grow significantly in 2022.
  • CPI reached 5.7% in February, with M/M data at 1% for the same month.
    • Core CPI has three different bands median, common, and trim, all at 3.5%, 2.6% and 4.3%, respectively, all on a year-on-year basis.
    • Commodity prices are rising, and we expect this to continue, with food and energy costs rising considerably.
    • In conjunction with higher material costs, shipping costs will lead to higher costs for businesses and, in turn, the consumer.
    • We expect shipping delays and container shortages to prevail due to the war in Ukraine and China's zero-tolerance on COVID-19.
  • Canada will benefit from higher oil and gas prices, boosting the trade balance. This shift will be a structural change in the fundamentals due to the sanctions on Russia.
    • We expect to see exports of Canadian oil; however, the challenge will be investment and bottlenecks.
    • The fundamentals for the oil market have shifted and remain structural bullish. If the war ends tomorrow, sanctions will not, and therefore, the shortfall in supply will need to be filled. OPEC has spare capacity, but the agreement between the U.S. and Europe for oil suggests a fundamental shift in rhetoric.
    • Investment in the oil and gas sector will need to grow at a steady clip with profitability elevated; conversely, the ESG premium now given to companies decarbonising may cause oil firms to improve investment in this space and efficiency in their oil assets.

Central Bank

  • The BOC increased interest rates, its overnight rate to 0.5%, the bank rate to 0.75% and the deposit rate to 0.5% in March.
  • The yield curve has flattened with only 20bps between the 2yr yield and the 10yr yield at 2.35% and 2.54%, respectively.
  • We expect near dated rates to continue to rise in line with interest rate hikes and tightening of monetary policy.
  • Inversion of long-dated yields typically suggests a recession, but the time lag will likely be 12-18 months. We expect equities to remain bid during this time and certainly in 2022.
  • We expect at least four more rate hikes over 2022 in Canada and watch data closely this week and next to indicate a 50bp move. This will be in conjunction with Quantitative Tightening.

The Fed and the BOC have increased interest rates and are likely to raise rates by 50bps in their next meeting as price rises in March kicked on and living costs increased significantly. Inflation will continue to push towards 10% in the U.S. and is slightly lower in Canada; however, businesses are still optimistic about the next 12 months, despite consumer expenditure declining. GDP is falling, and revisions have been on to the downside, and the higher inflation means CBs need to be careful to raise rates too fast, too quickly. The dollar has been bid due to the war and higher yields, but the loonie has remained largely rangebound but is breaking towards the YTD low at 1.2451, higher oil prices will benefit Canada, but the lack of investment could plague production. The link between the U.S. and Canada is strong, and we expect both economies to continue to soften in the coming months. The housing market may show signs of weakening due to the higher rates, impacting mortgage rates. We expect USDCAD to weaken through 1.2451, with the next key level at 1.24. Superseding this level is the October low at 1.2288. The move in the recent weeks has been strong as oil has rallied strongly. Near term weakness in the oil market due to COVID in China could see CAD weaken but we favour selling into it as the lockdowns will end and Chinese demand will improve. 

Volatility Commentary

The recent rally in oil prices have helped CAD strengthen vs USD, driving the pick-up in 1-month realised volatility to a 3-months high, that is to an increase of 2% circa over the last two months. Russian-Ukrainian conflict and the related Russian sanctions have certainly brought some disruption to the oil market on the supply side, and therefore upside to CAD, exacerbating further post-pandemic inflationary pressures. Additionally, a weaker consumer sentiment in US, paired with the threat of using other currencies to settle commodities payment, might soften US GDP growth outlook, and thus halt or slowing down USD in the near term. We expect this trend to last in the near term and favour buying a structure over the 1-month horizon to benefit from an upside in CAD vs USD.

USDCAD 1-month Implied vs Realised Volatility

USDCAD Trade Idea

  • Trade idea in 1-month (Exp 29-Apr-2022):
  • Buy USDCAD Window One-Touch, 1.24 Barrier, 01-Apr-2022 / 29-Apr-2022 Window, USD 50K Notional, Pay USD 32.8K circa.

  • Sell USDCAD One-Touch, 1.26 Barrier, USD 75K Notional, Rec USD 47K.

  • Total Structure Premium net receive USD 14.2K circa.

Positioning Charts

USDBRL NDO Positioning Data 15/03/2022 - 22/03/2022

We continue to see more downside exposure traded in the options market. The move through 4.80 has triggered put options to be traded at 4.50 with these options due to expire in the next 6 weeks. These put options have larger notional values suggesting greater conviction in the market. There has been a moderate increase in upside cover but there is still a strong downside bias. 

USDBRL NDO Positioning Data 22/03/2022 - 29/03/2022

USDCNY Vanilla Positioning Data 15/03/2022 - 22/03/2022

Options volume for the week to March 29th shows a lighter volume for USDCNY with no real pattern. Near term expiries suggest consolidation in the market below 6.40. However, as we move through April, there is little conviction in the options market from an option expiry point of view. There is a split between puts and calls and the options traded show a wide range between 6.30-6.50 and even wider as we move through to May and June. 

USDCNY Vanilla Positioning Data 22/03/2022 - 29/03/2022

USDCAD Vanilla Positioning Data 29/01/2022 - 29/02/2022

There has been a moderate shift in market sentiment between February and March as spot moved lower. This was fairly evident from Chart 1's positioning and the recent move lower outlines that the market suggests USDCAD will continue to trade around current levels. While Chart 2 shows that expiries moderately favour the downside but most put options in the near term trade a range 1.22-1.25. We have seen more call options executed in March, this does indicate a growing appetite for the currency to push higher, the majority of options have a strike price between 1.26-1.35. 

USDCAD Vanilla Positioning Data 29/02/2022 - 29/03/2022

Charts and Tables

FX Expiries

Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases

Technical Analysis

JP Morgan Global FX Volatility 


In recent weeks, the index has weakened below the support level of 10 DMA; the market settled at 8.97 today. The fall below the 8.85 level could pave the way for a challenge of 200 MA at 8.77, which would confirm the descending triangle formation we have seen in March. The MACD diff is negative and converging, suggesting waning downside pressures for the prices. %K/%D stochastics are oversold and about to converge, which would suggest a strong buy signal. On the upside, the index needs to gain a footing back above 10 DMA at 9.12, which could set the scene for a 100 MA level at 9.24. The indices suggest a change of momentum, and if the index finds support at 8.85 and corrects to the upside, we could see prices trend higher.

Dollar Index 


The index has weakened in recent sessions but struggled to break below the trend support level; the market has continued to edge higher since then, following the longer-term upside trend. The index now trades at 98.43. The MACD diff is positive and converging, suggesting waning upside pressures for the prices. RSI has fallen marginally higher, and %K/%D stochastics are rising in the overbought. To confirm the indicators and the shooting star formation, the index needs to break below the trend support, now at 97.95, which could pave the way for a challenge of 200 MA support at 97.81. On the upside, the pair needs to gain a footing above 50 and 100 MAs at 98.96, which could set the scene for 99.00. The MAs, however, created firm resistance levels and indicators point to a change of trend in the near term.



The pair has been gaining in the recent sessions, but resistance at 122.76 has proved to be strong, and the pair edged lower to 122.43. The bearish candles today have been less bid than recent gains, suggesting there is an appetite for higher prices above the near term resistance level. The stochastics are rising, with %K/%D edging towards the overbought, and the MACD diff just converged on the upside, a strong buy signal. To confirm the strength of the indicators, the pair needs to find the appetite for prices above 122.76; this could trigger gains through 123.80 and target 125.09, recent highs. On the downside, a break below the trend support at 122.02 would suggest growing selling pressures, but first, the index needs to breach support at 50 MA at 122.09. The most recent candle and indicators suggest we could see the index decline in the near term.



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