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Global hedge funds bet heavily against the Canadian dollar ahead of Wednesday’s Bank of Canada decision on interest rates and they were immediately punished after Governor Stephen Poloz increased policy rates as expected.

The accompanying chart highlights the increase in speculative short positions on the loonie in the past few weeks. The blue line illustrates Commodity Futures Trading Commission (CFTC) data showing the number of futures contracts outstanding that represent short positions on the loonie. The data are released every Friday, tallying the futures positions as of the end of trading on Tuesday.

RECENT SPIKE IN SHORT POSITIONS

CAD/USD (left scale)

CFTC Canadian dollar non-commercial

short futures positions (thousands

of contracts, right scale)

0.85¢

160

140

0.80

120

100

0.75

80

0.70

60

40

0.65

20

0.60

0

Sept.

2015

Jan.

2016

Jan.

2017

Jan.

2018

CARRIE COCKBURN/THE GLOBE AND MAIL,

SOURCES: SCOTT BARLOW; BLOOMBERG

RECENT SPIKE IN SHORT POSITIONS

CAD/USD (left scale)

CFTC Canadian dollar non-commercial short

futures positions (thousands

of contracts, right scale)

0.85¢

160

140

0.80

120

100

0.75

80

0.70

60

40

0.65

20

0.60

0

S

2015

N

J

2016

M

M

J

S

N

J

2017

M

M

J

S

N

J

2018

M

M

J

CARRIE COCKBURN/THE GLOBE AND MAIL,

SOURCES: SCOTT BARLOW; BLOOMBERG

RECENT SPIKE IN SHORT POSITIONS

CFTC Canadian dollar non-commercial short

futures positions (thousands

of contracts, right scale)

CAD/USD (left scale)

0.85¢

160

140

0.80

120

100

0.75

80

0.70

60

40

0.65

20

0.60

0

S

2015

N

J

2016

M

M

J

S

N

J

2017

M

M

J

S

N

J

2018

M

M

J

CARRIE COCKBURN/THE GLOBE AND MAIL, SOURCES: SCOTT BARLOW; BLOOMBERG

Beginning the second week of June, the number of futures contracts betting against the Canadian dollar has jumped sharply. The June 15 CFTC report (reflecting June 12 results), indicated 45,156 contracts shorting the loonie. This total jumped by more than 31, 000 short contracts by July 3 to 76,382 contracts.

The Canadian dollar, which had traded below 76 US cents at 6 a.m. Wednesday morning, jumped more than half a cent higher after Mr. Poloz raised rates (not shown on chart, which uses weekly data by necessity) and signalled that “higher interest rates will be warranted to keep inflation near target” in the accompanying statement.

The loonie later traded near levels before the Bank of Canada announcement. There is little doubt, however, that there are plenty of speculative funds that, so far, have either gotten burned by the Bank of Canada or failed to reap the gains of their pessimism on the Canadian dollar.

We won’t know how many hedge funds flattened their short positions on the loonie during the week ending with Tuesday’s close until the CFTC releases their reports on Friday.

Scott Barlow, Globe Investor’s in-house market strategist, writes exclusively for our subscribers at Inside the Market.

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