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Global hedge funds have been aggressively betting against the Canadian dollar in recent weeks, taking short positions to heights not seen since September 2008. A pessimistic view on commodity prices and signs of a U.S. economic recovery are the likely drivers of the trend.
The chart shows the net futures position on the Canadian dollar by hedge funds. A declining line indicates a rise in short positions as a percentage of the total. The trend since September 2012 has been decidedly and sharply lower, as hedge funds have increased short positions and lowered optimistic bets on the loonie.
The Canadian dollar to U.S. dollar cross has generally followed global commodity prices in recent years and the flatlining S&P/GSCI Commodity Index – the benchmark has declined 3 per cent in the last six months - is the most likely driver behind the loonie-based pessimism.
Signs of a rebound in the U.S. housing sector are also contributing to Canadian dollar weakness. A horrific, if under-followed deterioration in the major European economies and rising skepticism on the sustainability of China's economic progress have left U.S. dollar assets more attractive, if only on a relative basis. Continued sluggishness in commodity prices combined with a more optimistic U.S. economic outlook make Canadian dollar investments less attractive to global investors.
The chart makes clear that things change quickly in the currency futures market, so investors should not view the current trend as any kind of loonie death sentence. However, when the world's highest paid, most aggressive investors make high conviction bets against the domestic currency, Canadian investors should consider diversifying away from a 100 per cent Canadian portfolio allocation.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow