Foreign-exchange traders who had all but priced in a Bank of Canada rate hike are suddenly paying up to hedge against the risk of a letdown at Wednesday’s policy meeting.
The country’s five biggest lenders all brought forward their rate-hike expectations to January from April this month after the nation’s jobless rate dropped to its lowest in more than 40 years. But the cost to protect against loonie losses has skyrocketed after reports the U.S. would withdraw from the North American Free Trade Agreement gave investors pause and thrust the prospect of a stand-pat BoC into the spotlight.
Implied volatility contracts with a tenor of one week spiked to 10.6 intraday Tuesday, the highest since the days surrounding the central bank’s September gathering, when officials shocked markets with their second hike in as many meetings. The loonie fell as much as about 0.95 per cent Jan. 10, the most in more than two months, the day the NAFTA speculation swirled. The Canadian currency has gained about 6 per cent versus the U.S. dollar in the past 12 months, and the pair currently trades around $1.2430.