Traders have piled into record wagers against the loonie, betting that a rapidly slowing Canadian economy and a dovish central bank will deepen the currency’s 2024 decline.
A Record Bet Against the Loonie
Hedge funds and asset managers amassed a roughly US$14 billion short position in the Canadian dollar in early August, Commodity Futures Trading Commission data show. It was the largest for the loonie in data going back to the 1990s and nearly double the prior peak bet on losses in Canada’s currency.
The stance has since shrunk a bit as the loonie has strengthened the past few weeks, but it’s still quadruple the size of the next biggest currency short: the yen. Traders leaning toward a weaker loonie are likely feeling the heat as it has rebounded this month amid broad losses in the U.S. currency — keyed mostly to growing confidence in Fed cuts.
A Grim Backdrop for the Loonie
It all bodes poorly for the loonie, which tends to trade in concert with expectations for global growth and commodities, given that energy is Canada’s biggest export. Futures on West Texas Intermediate crude touched the lowest since January this week.
At around $1.3580, the Canadian dollar is down 2.5 per cent versus the greenback this year. Among Group of 10 currencies, only the beleaguered yen and the currencies of New Zealand and Norway — both closely tied to the commodities outlook — have weakened more.
A Speech That Could Shift Market Expectations
Against that backdrop, the focus will be on a highly anticipated speech by Fed Chair Jerome Powell at 10 a.m. New York time to gauge whether the market is on track with its pricing of almost a percentage point of total easing by year-end.
While it’s difficult to determine where traders entered short loonie bets, they’re increasingly getting squeezed as the currency gains, said Shaun Osborne, chief foreign-exchange strategist at Scotiabank. ‘We could be close to an inflection point here from a short-term view.’
A Long Bet on the Loonie
Market watchers will see on Friday afternoon whether traders are backing down in the face of the loonie’s August recovery, when the CFTC releases the latest positioning data at 3:30 p.m. New York time.
With assistance from Anya Andrianova
Key Takeaways
- Traders have piled into record wagers against the loonie, betting that a rapidly slowing Canadian economy and a dovish central bank will deepen the currency’s 2024 decline.
- The stance has since shrunk a bit as the loonie has strengthened the past few weeks, but it’s still quadruple the size of the next biggest currency short: the yen.
- Traders leaning toward a weaker loonie are likely feeling the heat as it has rebounded this month amid broad losses in the U.S. currency — keyed mostly to growing confidence in Fed cuts.
Sources
- Commodity Futures Trading Commission data
- Scotiabank
- Bloomberg
