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Briefing highlights

  • Net short position against loonie at fresh high
  • What to expect on Canadian GDP
  • What to watch for in trade reports
  • What else to watch for this week
Net short contracts against the loonie

Analysts believe speculators are making a huge wrong-way bet on the Canadian dollar.

“Speculative investors are clearly rolling the dice here,” Shaun Osborne, Bank of Nova Scotia’s chief foreign exchange strategist, said after the latest Commodity Futures Trading Commission report showed yet another weekly jump in the net short position against the loonie.

Though the gross short positions actually declined, the net showing has been building week after week, setting records along the way, even as observers such as Mr. Osborne say the shorts are underwater.

The CFTC numbers, released late Friday and measured as of last Tuesday, showed the net short position against the Canadian dollar rising to $7.3-billion (U.S.) or more than 99,000 contracts.

That’s the biggest bet against the loonie in records dating back to 1993.

“What’s the saying?” Mr. Osborne said. “Markets can remain irrational for longer than you can stay solvent ... something like that.”

There have been several reasons for pressure on the loonie over the past few months, among them diverging policies at the Canadian and American central banks, moves in oil prices, and concerns over both the Toronto housing market and Canada-U.S. trade tensions.

The loonie got a bit of a bump last Wednesday from what was seen as a less dovish policy statement from the Bank of Canada, though the sinking price of oil got in the way of that.

“Doubtless that will have taken out some more of the CAD shorts,” Mr. Osborne said, referring to the Canadian dollar by its symbol.

Note, though, that it’s the net showing that rose last week. Speculators actually pulled back on both gross long and gross shorts, so there was clearly some second sober thinking.

“At least the pace of additional net shorts is dropping, but the scale makes little sense in our regard,” said Bipan Rai, executive director of macro strategy at CIBC World Markets.

“It’s important to remember that this snapshot was taken before the Bank of Canada meeting last week,” he added.

“As such, we’d be surprised if speculators didn’t reduce their shorts in the next snapshot. The weaker U.S. dollar theme is here to stay. That implies that bearish bets on the loonie look misplaced – quarterly growth numbers out [this] week should confirm that.”

He was referring to a report coming Wednesday from Statistics Canada, expected to show strong economic growth in the first quarter.

“I don’t disagree with the implied sentiment here – I remain very cautious on the CAD’s near-term outlook, at least, but timing is everything; we’ve been negative on the CAD for some time,” added Scotiabank’s Mr. Osborne.

“The ... speculators are a bit late to the party.”

Indeed, he added, they’ve had a “hard time” with the loonie of late, by “building net longs when the CAD was weakening in March and building net shorts in the face of a pretty steep bounce now.”

The narrative is shifting, added Mark McCormick, North American chief of foreign exchange strategy at TD Securities.

Last month, the trade spats and housing concerns were driving the story, but that will change.

“The extreme positioning reflects this negative CAD narrative, but lopsided positioning also leads to corrections, especially if the narrative does not jive with underlying fundamentals or the news flow starts to change,” Mr. McCormick said.

“We have already begun to see a shift in the narrative away from Canada, thus leaving CAC to rally from this extreme short,” he added.

“The BoC made a gentle pivot towards a more constructive tone last week, increasing the scope that the bank will start to hike next year. Lastly, oil prices have held some key technical levels so a consolidation in the price of oil co uld support a squeeze near-term.”

What to watch for this week

As CIBC’s Mr. Rai noted, we’re going to see a nice lift in economic growth in Statistics Canada’s report Wednesday.

But, as the saying goes, that may be as good as it gets.

Economists expect the report to show that gross domestic product expanded in the first three months of the year at an annual pace of about 4 per cent, give or take half a percentage point, depending on who you ask.

“The outsized gain probably was fueled by stronger consumer demand for goods, services, and homes, as well as a modest rebound in business investment,” said Citi Research economist Dana M. Peterson.

But, as the Bank of Canada and others noted last week, that exceptional growth will slow in the second and following quarters.

As Ms. Peterson put it, the “best and worst” of Canada’s recovery will be in the spotlight as that strong GDP report is followed on Friday by a look at the latest trade numbers.

Some economists expect to see that the merchandise trade deficit widened in April to about $500-million, though others see the possibility of a tiny surplus.

“International trade remains Canada’s Achilles Heel,” Ms. Peterson said.

Markets, though, will be paying more attention to the May U.S. jobs report. Economists believe about 180,000 jobs, or more, were created last month, with unemployment holding at 4.4 per cent or ticking up a notch.

“It would take a big miss [on the job-creation number] to alter the market’s perception that the U.S. is closing in on full employment,” said CIBC economist Royce Mendes.

The calendar:


U.S. markets are closed for Memorial Day.


Statistics Canada releases the first of two trade-related reports, this one on the current account balance. Economists generally expect the report to show the deficit widened in the first quarter to between $11-billion and just shy of $14-billion, from $10.7-billion in the last three months of 2016.

“A chunky rebound in imports swamped the gain in exports, pushing the merchandise trade account back into deficit,” said Benjamin Reitzes, Canadian rates and macro strategist at BMO Nesbitt Burns.

“The non-merchandise deficit, which widened sharply in the decade to 2013 due to the appreciating Canadian dollar, likely remained in a narrowing trend, due to the softer loonie,” he added.

“Our estimate [of $12-billion] would peg the current account shortfall at around 2.3 per cent of GDP, a one-percentage-point improvement from the 2016 average.”

On the corporate front, quarterly Canadian bank results are almost over, with Scotiabank and Laurentian Bank of Canada reporting Tuesday, followed by National Bank of Canada Wednesday and Canadian Western Bank a day later.

Canaccord Genuity Group also reports Tuesday.


Along with the Canadian GDP report and National Bank results come earnings reports from Brick Brewing Co. And Hewlett-Packard Enterprise Co.


Purchasing managers index readings will be reported around the world, as will Canadian and American May auto sales.

Saputo Inc. reports quarterly results,p along with Canadian Western Bank.


As noted, the biggie is the U.S. jobs report, and the Canadian trade measure.

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