CAD: Currency Index & Volatility

Relative Currency Strength

The Canadian dollar could certainly be considered the most successful currency of the past week. After spending the previous period below the baseline and ending up with the largest loss, the Loonie recovered to share the best performer’s title with its Australian counterpart. The CAD showed a positive trend right from the beginning of the period, and its total gains against other currencies were most noteworthy - it advanced 0.98% against EUR and NZD, and 0.95% against CHF.

July 16 provided the initial boost for the CAD Index, raising it to the level that it held for the rest of the period. In the aftermath of BoC monetary policy report and press conference, the index jumped to 100.33 mark, and remained largely unchanged until Thursday morning. However, the period’s greatest surge happened on Friday, when a sharper-than-expected rise in Canadian CPI pushed the CAD Index from 100.16 to 100.52. Several other indexes fell at the same time, with the CHF and the GBP indexes losing 0.14% and 0.11%, respectively. Consequently, the Canadian dollar’s index held in a range from 100.3 to 100.6 until the end of the period.

Volatility

As days shifted in the period, the beginning of this week proved to be significantly less turbulent than that of the previous one, leaving the overall market volatility subdued in comparison. Portion of elevated volatility lost 8% for the market and 2-9% for the observed currency pairs, while the highest peaks either remained unchanged on Friday values, or decreased with July 15 leaving the sample. The pound seemed to be the one to calm the most, while the yen’s characteristics changed the least. USD/CAD was among the pairs whose portion of elevated volatility palpably decreased, and its average value of volatility index fell from 0.95 to 0.88.

The highest peaks of USD/CAD volatility index, which were also the overall highest peaks of the period, were reached on July 16 and July 18, both against the background of major Canadian releases. On Wednesday, the BoC announced its interest rate unchanged at 1%, but cut its projections for the coming two years, stating that lower growth in global economy is likely to weaken the countries economic activity. The Loonie slumped against the U.S. dollar, but then reversed its movement to rapidly recover, resulting in a 3.96 points high spike in volatility index. On Friday, Canadian CPI, fuelled by energy prices, rose more than expected, and this time the Greenback dipped against its Northern counterpart. The USD/CAD volatility index reached 3.83 points—the period’s second highest value.

Currency Significance

The Canadian dollar’s correlations were on a very high level throughout the period, as even the minimum value of the composite was in line with significance limit. The components, save for the South Pacific crosses, shifted closer to their higher historical values, with period’s average coefficients well above the long-term measurements. Correlations with CAD/AUD and CAD/NZD, in turn, were the only ones to shift into negative during the period. And while otherwise the strength of bonds with CAD/AUD were elevated similarly to the other currency pairs, CAD/NZD correlations were slightly below their usual level.

The CAD significance measure started to climb up on Wednesday morning, and reached the 0.6 mark by the beginning of the BoC press conference. Another hike, similarly as in the other observed parameters, followed the CPI data release on Friday. As this time the strengthening extended to all the components, the composite reached its period’s maximum of 0.8, and managed to hold above 0.7 even after the weekend. The turning point seemed to arrive on Tuesday, as the Greenback slumped against its peers on disappointing core CPI, bringing the CAD significance measure to the period’s minimum and leaving it to finish the day barely above 0.3.