A surge in the cost of options to protect against increased USD/CAD volatility can be put down to broader risk aversion and the drop in oil and equities that fuelled a 140+ USD/CAD spike Tuesday, but premiums for Wednesday's Bank of Canada policy announcement show it's not without risk, and traders shouldn't be complacent.
The broader consensus is for the BoC to taper asset purchases from C$4 billion to C$3 billion a week.
The growth outlook and forward guidance should be more optimistic after strong Canadian data and good vaccination progress.
The BoC said in January and March that slack should be absorbed and inflation sustained above 2% going in to 2023.
However, the central bank won't want the market to start pricing early hikes, and is likely to strike a dovish tone - perhaps underlining the risk of new covid variants and potential lock-downs.
Overnight expiry USD/CAD implied volatility is 12.5 - from 9.0 Tuesday - its highest in over a month, and a break-even for vanilla straddles of C$66 pips from C$47 pips in either direction.
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