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Briefing highlights

  • Shorting of loonie at fresh high
  • Markets at a glance
  • Canadian dollar above 74 cents
  • What to expect from Poloz Wednesday
  • All eyes on Canadian bank earnings
  • What to expect from OPEC meeting

Upping the ante

Speculators are putting down billions in what may well be a “losing bet” against the loonie.

The net short position against the Canadian dollar has now climbed to $7.2-billion (U.S.), according to the latest numbers from the Commodity Futures Trading Commission, which were measured as of last Tuesday and reported late Friday.

Shorting of the loonie has been rising sharply, up from $6.3-billion a week earlier and $3.5-billion the week before that.

In contract terms, the net short rose to 98,000 from 86,200, marking the biggest bets against the currency in records dating back to 1993.

That surprised Shaun Osborne, Bank of Nova Scotia’s chief foreign exchange strategist, who believes speculators upped the ante on a “losing bet” given that they were “already effectively underwater” a week earlier.

“Oil prices firming are CAD-positive and represent a threat for CAD shorts, and more U.S. political risk could hurt the USD,” said Mr. Osborne, referring to the Canadian and American dollars by their symbols.

“Weaker stocks, on the other hand, would weigh on the CAD,” he added.

“There’s a lot of contrary influences on the CAD at the moment, but the bottom line for the CAD shorts is that the CAD is not moving the way they expected.”

Those influences include the trouble at Home Capital Group Inc. and concerns over the broader mortgage financing system in Canada, even though that situation is believed to be contained.

Investors are also worried about inflated house prices in southern Ontario, as well as rising trade tensions between Canada and the U.S., and their potential impact on the economy.

Mr. Osborne isn’t alone in thinking the speculators are wrong, particularly given the bump in the loonie last week to above 73.5 cents. It now stands at about 74 cents.

To begin with, the CFTC numbers lag, said Bipan Rai, executive director of macro strategy at CIBC World Markets, who believes that some short positions were closed ahead of Canada’s long weekend, and that the next reading will reflect that.

“There still is a sizeable bias to be short the loonie for reasons other than the current economic backdrop – which includes housing and political risks,” Mr. Rai said.

“However, once it becomes apparent that those risks are overdone, we expect the scale of short positions to be reduced dramatically.”

Not only that. Mark Chandler, head of fixed income and currency strategy at RBC Dominion Securities, has looked at past episodes and found that short positions are not “a great predictor of future performance.”

Mr. Osborne and his Scotiabank colleague, foreign exchange strategist Eric Theoret, have also looked at five previous episodes, finding the results to be mixed in the days and weeks after a sharp run-up.

“The USD does tend to weaken, supporting the validity of the contrarian view, but the performance is patchy – the sell-off in the USD can be shallow, can take time to develop and does not always produce a clean ‘flush out’ of short CAD positions,” they said in an earlier report.

This could be an interesting week for the loonie because of the Bank of Canada’s rate decision Wednesday. Oil prices, which can move commodity-linked currencies, are also at play as OPEC and other producers meet in Vienna Thursday to possibly extend a crude output-cap agreement that has helped support the market.

Bank of Canada Governor Stephen Poloz and his colleagues aren’t expected to change their benchmark rate from its current 0.5 per cent.

“The bigger issue is whether the bias will be incrementally altered,” said Derek Holt, Scotiabank’s head of capital markets economics, referring to the central bank’s stance and citing the “pile-on” of those shorting the loonie.

“This has been in anticipation of incrementally more bearish news for the economy and financial system – and the Bank of Canada’s possible response,” Mr. Holt said.

But “such expectations are likely to be disappointed,” he added, noting that Mr. Poloz has already said that Home Capital’s woes are isolated and that, at this point, economic growth is “ripping.”

Markets at a glance

What to watch for this week

Canada’s big banks begin reporting second-quarter results Wednesday amid the concerns over home prices and household debt levels, and after a recent downgrade by Moody’s.

“On average we are forecasting 14-per-cent [earnings-per-share] growth from the big six,” said National Bank of Canada analyst Gabriel Dechaine, referring to his bank, Bank of Montreal, Royal Bank of Canada, Toronto-Dominion Bank, which all report this week, and Scotiabank and Canadian Imperial Bank of Commerce.

Among the issues are credit quality, which Mr. Dechaine said “continues to defy expectations,” and capital ratios, which are expected to “flatten” at 11 per cent.

And, of course, housing and growth of the mortgage market.

“From 30 per-cent housing price appreciation in Toronto that resulted in regulatory action by the province of Ontario to the ongoing Home Capital drama, there has been no shortage of market developments,” Mr. Dechaine said.

“Given rapid home price escalation and seasonality we believe [second-quarter] mortgage market growth could be robust, perhaps too much so,” he added.

“Outlook commentary from the banks will hopefully address a variety of investor concerns.”

Here’s a snapshot of the rest of the week:


A big central bank day. First up is the Bank of Canada at 10 a.m. ET, followed by the release of the minutes from the Federal Reserve’s early May meeting.

“The bottom line is that while the economy is picking up steam, the combination of low inflation and more restrictive housing policy measures will bide the Bank of Canada some time to raise rates at least until the spring of next year,” said TD economist Diana Petramala.

On the corporate front, BMO kicks off the bank earnings. Also reporting quarterly results are Lowe’s Cos. and Tiffany & Co.


Two key meetings are on tap, including the OPEC discussion in Vienna and a chat between President Donald Trump and European Union officials in Brussels.

“A successful extension of the OPEC+ agreement through the end of this year, combined with the rising global demand for oil, estimated by the International Energy Agency at 1.3 million barrels/day in 2017, would more than offset increasing output in the U.S. and by other major producers not participating in the OPEC+ agreement,” said Earl Sweet, BMO’s head of economic risk.

“With global demand finally moving above supply, there is a good chance to achieve market rebalancing by the end of this year or early 2018,” he added.

“Once that is achieved, the unwinding of the agreement would have to be phased in to avoid a return to an oversupplied market.”

RBC and TD report results, as do Best Buy Co., Costco Wholesale Corp. and Heroux-Devtek Inc.


Key is a Group of Seven summit in Sicily. There’s also another estimate of U.S. first-quarter economic growth.

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