The Royal Bank of Canada (BoC) will make an announcement on interest rates this Wednesday and it is now widely anticipated they will move rates to .75%, which represents a hike of a quarter point. The decision has been the object of considerable speculation recently with analyst opinions wildly swinging back and forth from hike to no hike as the CAD has enjoyed a significant run the last few months.
The frenzied environment around USDCAD received an additional catalyst last Friday with a monster jobs print from the Canadians. While the nonfarm payrolls in the USA received most of the attention globally, Canada reported adding 45,000 jobs versus a forecast of 10k. A rate hike seems almost like a foregone conclusion now. The market quickly priced in a hike with near 100% certainty as the CAD rocketed higher on Friday, causing a precipitous drop in the USDCAD pair.
But this only represents part of the story for the Canadian Dollar. There are several factors in play for CAD; notably oil and USD positioning in addition to the rate decision. Oil market volatility alone could have a significant spillover effect to USDCAD. Historically, the CAD demonstrates a meaningful level of statistical correlation with oil prices. Below is a linear regression showing the correlation from mid-July through the end of August 2016, the same period seasonally we are now entering.
Oil has been under considerable pressure due to a supply glut, and there does not appear to be any relief from that soon, as last week’s rig count report showed another weekly increase. If there are continued supply concerns generated from this week’s inventory report from the Energy Information Agency (EIA), oil prices could take a sharp leg down midweek, around the time we get to the BoC announcement.
It is also worth considering there could be a decision to leave rates alone until the next meeting. Based on the move last Friday, it appears the impact of that would be considerable and would be constructive to a significant uptrend reversal in USDCAD.
In addition, at about the same time as we get the rate decision from BoC on Wednesday morning, we will get an update on oil inventories in the US, and Fed Chair Yellen begins her testimony to congress, which could certainly drive a move in the dollar.
In other words, several narratives could materialize for the pair this week. A retreat could be in play, as traders could experience a classic “buy the rumor, sell the news” move by the time we get to the announcement on July 12. Several other price directions are possible including; a natural technical retracement off Friday’s levels, buying pressure brought on by the actual announcement, selling pressure as positions unwind on the announcement, a down move correlated with lower oil prices, or major selling due to the potential for no hike or another dovish surprise in the announcement. This could set the stage for a volatile week and the opportunity for binary traders to consider a strategy to buy the potential volatility surrounding USDCAD.
A binary trader could have a set up to buy potential volatility in the CAD this week by considering a strategy to cover both sides of the market if they expect dramatic moves but are unsure of exact price direction. On Friday alone, this pair ranged from roughly 1.2993 to 1.28576. For example, a trade strategy built on expected price swings could look to possibly stake out a buy position at the high end of that range and also potentially sell a position below 1.2875 if a trader expected large swings in the CAD this week and wanted to buy the potential volatility.
Given the dramatic move we saw right before market close last Friday, and the potential for news from oil, the Fed, and the Royal Bank this week, there are many possible options for binary traders to consider the potential for trading on the volatility surrounding the CAD, and the idea above is one possible example. An individual trader needs to consider their own risk appetite and strength of conviction and to carefully weigh the cost of buying volatility against the risk that the market fails to make any kind of dramatic move.