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business briefing

Briefing highlights

  • Speculators turn against the loonie
  • Loonie shy of 75 cents
  • What to expect from Canada's GDP report
Net short position in loonie: CFTC

The big short

Speculators have turned against the Canadian dollar in a sudden – and huge – bearish swing.

Indeed, Bank of Nova Scotia believes it to be the largest-ever shift against the loonie in weekly reports from the U.S. Commodity Futures Trading Commission.

The numbers, released by the CFTC Friday and measured as of last Tuesday, showed a net short position in the loonie of $1.8-billion (U.S.), a wrenching shift from a net long of $1.6-billion a week earlier.

In terms of contracts, it marked a change to a net short of 24,000 from a net long of 22,000.

“We had struggled to fathom the market’s apparent enthusiasm for the CAD in the face of some rather soft price action recently, and the CAD bulls apparently concurred last week,” Bank of Nova Scotia currency strategists Shaun Osborne and Eric Theoret said Monday, referring to the Canadian dollar by its symbol.

“This was, we think, the largest one-week positioning swing in the CAD ever seen (certainly in recent years,” they added, citing the hit to the currency’s “pride” after a run-up in net long positions.

“We continue to think that caution on the CAD outlook is warranted and that recent data releases have perhaps overplayed the state of affairs in the Canadian economy to some extent.”

Asked to speculate as to why this happened, Mr. Osborne, Scotiabank's chief foreign exchange strategist, suggested earlier that it may have had something to do with the swing in euro sentiment.

“It is possible that the shift in EUR positioning (more net buying) and CAD selling reflects a big position in [the euro against the loonie] being unwound.”

The net short position in the euro is, in fact, at its lowest in about three years.

Remember, the French presidential debate was held last Monday, the day before the CFTC measure, and was seen as a victory for Emmanuel Macron over his way-far-right opponent Marine Le Pen.

The marked shift for the loonie took place despite there having been no significant erosion in the currency, noted Charles St-Arnaud of Nomura’s economics group.

“I think a lot of investors have used CAD as a proxy for oil,” Mr. St-Arnaud said, noting that crude prices, though generally stable, had dropped a week earlier on regular inventory reports of higher supply.

“What I find interesting is that the inventory accumulation in 2017 is no different from last year and oil rallied at this time of the year in 2016,” he added.

“Makes me think that positioning in oil may be the main driving force in the price currently.”

Mark McCormick, the North American head of foreign exchange strategy at TD Securities, said this could heighten still further.

“It shows the bulk of the leveraged community has jumped on board the short CAD theme, which we think still has some ways to go,” Mr. McCormick said.

“The CFTC is not predictive, but it is a reliable contemporaneous indicator that I like to refer to as a rubber band,” he added.

“In other words, how far can you stretch the rubber band until it pops? This drawdown in CAD longs (while sizable) is consistent with the liquidation of other risk assets like the [New Zealand dollar] and the S&P 500 ... We could still see more downside in CAD since positioning does not look stretched.”

The Canadian dollar is now hovering at around the 75-cent mark.

And there’s already an impressive array of forces lined up against the loonie, from the uncertainty over oil prices and the potential impact of President Donald Trump’s trade policies to, most importantly, the different paths of the Fed and the Bank of Canada.

Many forecasters expect the loonie to tumble further, to somewhere between 71 and 73 cents.

What’s largely at play here is the divergence between the Fed, which is in the midst of raising interest rates, and the Bank of Canada, which isn’t expected to do so for some time, making the loonie less attractive against the U.S. dollar.

Nomura’s Mr. St-Arnaud, however, believes the loonie could gain going forward as long as oil prices don’t tumble.

“The data in Canada has improved and we could see the market pricing in some probability of rates normalization,” he said, referring to the Bank of Canada..

“In the U.S. the rate hikes are priced in. The USD could also depreciate if the market starts to question the ability for Trump to pass tax cuts and the reduction in regulation.”

Markets are doing exactly that in the wake of Mr. Trump’s failure to push through changes in health care, a huge defeat in his first legislative test.

A currency can come under pressure when short positions are being built, Mr. St-Arnaud said.

“What is important is that now that they are short, they may at some point need to cover those positions if the Canadian data remain strong or if oil prices recover,” he added.

“This would put appreciating pressures on CAD.”

Ipek Ozkardeskaya, senior market analyst at London Capital Group, agreed the Canadian dollar could rise, possibly to 77 cents.

What to watch for this week

These won’t be the busiest few days ever on the data front but the week will close out with a key economic report.

First up, though, is Bank of Canada Governor Stephen Poloz with a speech Tuesday.

Markets will, of course, be watching for signals in the belief that Mr. Poloz will at some point have to change his “dovish” tune in the face of steadily improving indicators that now have analysts raising their growth forecasts.

Then, Statistics Canada reports Friday morning on how the economy actually fared in January, and economists expect we’ll see that gross domestic product kicked off 2017 with growth of 0.3 or 0.4 per cent.

“Many of the factors behind the bank’s cautious tone of late remain unchanged – the prospect of rising U.S. protectionism, disappointing non-energy export performance, sluggish investment intentions and mute wage pressures/hours worked among them,” Mark Chandler of RBC Dominion Securities said of Mr. Poloz.

“However, the accumulated weight of better headline activity indicators of late (both in terms of jobs and GDP now) must be helping to assuage at least some of these concerns.”

On the corporate front, we’re going to get what I like to call the bums-and-thumbs reports: Lululemon Athletica Inc. posts quarterly results on Wednesday, and BlackBerry Ltd. is out with earnings on Friday.

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