The spread between three months implied vs realized vol in CAD is too wide. There remains strong interest to sell C$ volatility as the spot corrects back over 1.2500 and now with Friday’s close over 1.2600, however, this move looks like the market is getting ahead of itself.
Short vol positions in the body of the curve should be hedged with nearly dated gamma which in our view remains a good buy at levels under 7%. We remain of the view that the CAD Dollar will remain under pressure and look for a correction back to 1.3000 by the end of the year.
The weak retail sales numbers and not so hot inflation numbers contributed to the growing confidence in the market that the BoC will remain on hold up to the end of the year. Still, two weeks realized remains below the six weeks 7.75 vs 8.05 for the two and six respectively. Momentum is holding in positive US$ territory. More significantly, 2YR bond spreads flipped back in favour of the US$.
Commodity prices remain stable and firm which is typically the case ahead of the Chinese party conference. However, going forward China may well start to take renewed measures to cool the domestic economy, and this would start to remove another leg of support for the C$ and commodity block in general.
Sterling is holding on to its daily trend line and GBP options prices are trading in line with the realized vols. The persistent gap between GBP implied trading under the actuals has now fully reversed and the two are back in line.
Short term GBP momentum is trading close to par and last week moved marginally back into negative territory.