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CAD/USD volatility continues as Canadian and U.S. monetary policy diverges

May 1, 2023


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.

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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.

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