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BOC: CAD Risk Premium Builds into Potential First Cut of the Cycle

BOC
  • CFTC data shows markets have been building CAD shorts at a swift pace over the past three month, flipping the net position from neutral in February, to outright short (net short equates to 33% of open interest). 
  • Positioning adjustments gel well with options market activity, which have favoured USD/CAD upside insurance over the past month. Sizeable demand has been building for call strikes layered between 1.3725-1.3750, but topside interest is also evidenced in further OTM calls: over $10bln notional has been wagered against 1.38-1.39 calls over the past month.
  • Overnight CAD vols have built a decent risk premium headed into the decision, with overnights clearing 10 points for only the sixth time in 2024, doubling the average YTD background vol to imply a ~60 pip in USD/CAD into tomorrow's NY cut. 
  • While consensus looks for a 25bps rate cut today, there remain a sizeable minority looking for easing to be delayed until the July decision - leaving markets ~80% priced for a cut today. Those that see a July, rather than a June, cut cite Fed re-pricing, the dangers of US-CA rate differentials and the still-booming local housing market. 
  • MNI's full BoC preview found here: https://roar-assets-auto.rbl.ms/files/64492/BOCPreviewJun2024.pdf
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