The Canadian Dollar (CAD) performed well last week as the US Dollar (USD) dropped by 1.6% through Friday, making the CAD one of the week’s stronger major currencies.

There is an unusual negative correlation between the CAD and US equities at -36% on a rolling one-month basis; this is rare. Typically, CAD would align with equity sentiment, offering some buffer against US stock market fluctuations.

Bank Of Canada Commentary

Bank of Canada Governor Macklem noted increased volatility in core inflation. He stated multiple factors would influence the upcoming rate decision, suggesting possible market adjustments.

USD’s fall through support at 1.3745/50 sets the CAD for a further potential advance. There is minimal support for the USD until reaching the 1.34/1.35 area, suggesting a possible full retracement to 1.3420.

This recent shift shows an atypical break in established correlations. A Canadian Dollar climbing while US equities falter flips a traditional relationship on its head. Normally, the appreciation in risky assets, like stocks, carries the Loonie upward with it. Instead, over the past month, we’ve seen the opposite dynamic play out, marked by the -36% rolling one-month correlation. This dislocation hints at another driver moving the CAD now – not equity sentiment, but possibly something more rooted in relative monetary expectations or external demand for Canadian assets. When the usual guides go quiet, we look elsewhere.

The remarks from Macklem earlier in the week added texture. While he did not outline any firm guidance, his reference to “increased volatility” in core inflation reads more like a warning than a benign observation. When a central bank acknowledges conflicting inflation pressures and states that “multiple factors” will shape its next decision, we can interpret that as leaning towards optionality rather than strict guidance. Variability in inflation readings, especially at the core level, opens the possibility for surprise – up or down. It places more emphasis on second-tier data in the coming weeks: retail sales, labour force developments, industrial activity.

Volatility Pricing And Risk Appetite

From a price-action perspective, the USD’s slip below the 1.3745/50 zone shifts near-term flow expectations quite clearly. With that floor gone, what’s beneath us now is that wide, lightly contested range in the low- to mid-1.34s. The last time price spent any duration down there was in January, and it moved through quickly. That suggests liquidity could get patchy, aiding momentum in either direction. We should be aware that if momentum traders sink in further shorts on USD/CAD, a chase-down to 1.3420 remains plausible – perhaps not guaranteed, but no longer remote. Cleanup of stale USD positioning may exaggerate the push.

For trading around derivative instruments, all of this puts the emphasis strongly on volatility pricing. Premiums for CAD calls might still be underestimating the scale and speed of currency adjustments, considering such unusual correlations and potential shifts in domestic rate outlooks. We can justify looking at spreads that favour moderate but directional follow-through lower in USD/CAD. However, tokens of protection should be considered, especially with macro events like the US employment figures and Canadian CPI data not far out.

Also worth keeping in mind: if risk appetite sours further and the CAD continues to rise irrespective, carry trades that benefit from interest differentials may not provide the typical buffer. The relative quiet from Canadian policymakers this week could later give way to sharper communication if markets begin front-running rate cuts or dismiss V-shaped inflation prints. That’s not the current base case, but one shouldn’t get caught assuming yesterday’s correlations will hold without challenge.

Lastly, allow space for positioning behaviour to bend technical guides. Large players may be acting more rapidly to shifts and not waiting for textbook confirmations. This could make short-term volatility more erratic. Skew might not fully catch up – a space worth watching.

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