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CAD deviates more than AUD, but with less volatility

Friday, March 6, 2015 10:21 AM UTC

Unsurprisingly, the AUD and CAD exhibit a strong correlation. Hence, trading a divergence between these currencies expresses a view on temporary adjustments rather than long-term trends. The relationship between them was very linear in 2013 but has clearly become convexsince 2014.

Societe Generale notes as follows:

When AUD/USD drops, the degree of USD/CAD appreciation is greater. This observation seems inconsistent with the fact that AUD/USD implied volatility has always exceeded USD/CAD volatility.
But this convexity shows that the CAD tends to deviate more than the AUD but that the CAD moves are eventually less volatile. Therefore, it is attractive to buy USD/CAD options and sell AUD/USD options.

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CAD deviates more than AUD, but with less volatility

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