With Canada's inflation numbers coming in under expectations on Friday and oil finding limited support over $43, the market is assuming that the pressure on the C$ shorts to unwind their extended positions has passed and the correction danger has passed it's peak. While this may prove true over the longer term, there are some reasons for caution, given that we have not yet seen a complete wash out in the short positions according to the COT report. Granted the level of shorts has declined but still remain historically elevated. Secondly and more to my point is the chart above which shows the short term correlation of one month implied vol and spot. While not the most consistent and reliable indicator, as it can be early at times, it does suggest that more C$ upside is likely. While we largely subscribe to a bearish C$ view over the longer term, the position is likely to be the main driver in the near term. And while short term
vols
have moved higher, tested and failed to break 6% in the 3mos,
vols
are very likely to be under pressure once again in the near term.
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