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Investors worldwide across asset classes have positioned for a strong global economic recovery, and this includes speculative hedge funds that have built up significant bullish positions on the Canadian dollar. The problem is that signs of this growth resurgence remain scarce, and unless growth picks up soon, the loonie may have to deal with rapid selling pressure.

The extent to which equity markets have priced in an economic recovery is a major risk for investors as we head into 2020. Thursday’s market rally after U.S. President Donald Trump hinted that a trade deal with China was imminent only exacerbated a situation where stock prices are running well ahead of the global economy.

The first accompanying chart shows that the year-over-year change in Canadian equities, which has historically tracked the annual change in global manufacturing activity (represented by the JPMorgan Global Manufacturing PMI, a composite index), has moved higher far more quickly than the global growth data suggest it should.

Betting on a global resurgence

S&P/TSX Comp. Index

(YoY % chg.)

JPMorgan Global

Manuf. PMI (YoY % chg.)

30%

8%

25

6

20

4

15

2

10

5

0

0

-2

-5

-4

-10

-6

-15

-20

-8

2013

2014

2015

2016

2017

2018

2019

Betting on a global resurgence

S&P/TSX Comp. Index

(YoY % chg.)

JPMorgan Global

Manuf. PMI (YoY % chg.)

30%

8%

25

6

20

4

15

2

10

5

0

0

-2

-5

-4

-10

-6

-15

-20

-8

2013

2014

2015

2016

2017

2018

2019

Betting on a global resurgence

S&P/TSX Composite Index

(YoY % chg.)

JPMorgan Global Manufacturing

PMI (YoY % chg.)

30%

8%

25

6

20

4

15

2

10

5

0

0

-2

-5

-4

-10

-6

-15

-20

-8

2013

2014

2015

2016

2017

2018

2019

The pattern on this chart – equities climbing quickly ahead of the data in anticipation of an imminent growth recovery – is apparent for equity indexes across the world, including the MSCI World Index (second chart).

This growth optimism extends to the Canadian dollar. Because of our resource-intensive asset markets and trade-oriented economy, the loonie has previously moved in accordance with global growth and materials demand.

The Commodity Futures Trading Commission publishes weekly data covering bullish and bearish positions in numerous asset classes including equities, bonds, commodities, currencies and even carbon dioxide emissions. The non-commercial section of each report is used as a proxy for global hedge fund speculation in the futures market.

JPMorgan Global

Manuf. PMI (YoY % chg.)

MSCI World Index

(YoY % chg.)

30%

8%

25

6

20

4

15

2

10

0

5

-2

0

-4

-5

-6

-10

-15

-8

2013

2014

2015

2016

2017

2018

2019

JPMorgan Global

Manuf. PMI (YoY % chg.)

MSCI World Index

(YoY % chg.)

30%

8%

25

6

20

4

15

2

10

0

5

-2

0

-4

-5

-6

-10

-15

-8

2013

2014

2015

2016

2017

2018

2019

JPMorgan Global Manufacturing

PMI (YoY % chg.)

MSCI World Index

(YoY % chg.)

30%

8%

25

6

20

4

15

2

10

0

5

-2

0

-4

-5

-6

-10

-15

-8

2013

2014

2015

2016

2017

2018

2019

The third chart presents speculative positioning for the domestic currency compared with the actual spot price. The blue line represents the net futures positioning on the loonie – bullish bets minus short positions.

The chart highlights that since late June, the dollar spot rate (purple line) has remained stubbornly quiescent, stuck between 75 US cents and 76.5 US cents. At the same time, bullish hedge fund bets on the loonie have ramped higher – the net futures position on the domestic climbed 42 per cent from just over 38,000 to a high of 54,000 contracts in early November.

The futures positioning has pulled back a bit – likely owing to tensions in the U.S.-China trade dispute that threaten global economic growth. Still, a divergence remains on the chart, with hedge fund bullishness well above the spot price.

CAD/USD

CFTC non-commercial net futures

positioning on Cdn. dollar (contracts)

$0.82

80,000

0.81

60,000

0.80

40,000

0.79

20,000

0.78

0.77

0

0.76

-20,000

0.75

-40,000

0.74

-60,000

0.73

0.72

-80,000

D

J

F

M

A

M

J

J

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O

N

2018

2019

john sopinski/THE GLOBE AND MAIL

SOURCE: scott barlow; bloomberg

CAD/USD

CFTC non-commercial net futures

positioning on Cdn. dollar (contracts)

$0.82

80,000

0.81

60,000

0.80

40,000

0.79

20,000

0.78

0.77

0

0.76

-20,000

0.75

-40,000

0.74

-60,000

0.73

0.72

-80,000

D

J

F

M

A

M

J

J

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O

N

2018

2019

john sopinski/THE GLOBE AND MAIL

SOURCE: scott barlow; bloomberg

CAD/USD

CFTC non-commercial net futures

positioning on Canadian dollar (contracts)

$0.82

80,000

0.81

60,000

0.80

40,000

0.79

20,000

0.78

0.77

0

0.76

-20,000

0.75

-40,000

0.74

-60,000

0.73

0.72

-80,000

D

J

F

M

A

M

J

J

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O

N

2018

2019

john sopinski/THE GLOBE AND MAIL, SOURCE: scott barlow; bloomberg

Hedge fund managers are famously impatient. Without a resumption in global economic activity that would spur a rally, the bullish futures positions will be unwound and the hedge funds will look for more profitable short term trades.

Futures markets are by no means the biggest influence on the value of the loonie – domestic bond yields relative to U.S. yields, the oil price and the copper price are more influential – but a reduction in speculative bullishness will put downward pressure on the currency.

The current bullishness on the Canadian dollar is indicative of global asset markets that are increasingly gambling on a strengthening worldwide global economy in 2020. There are certainly signs that the sharp deterioration of growth seen this year has bottomed out, but it’s also the case that a lot of growth is already priced in. Be warned: Disappointing data is likely to be met with selling in many markets in the months ahead.

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