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Briefing highlights

  • Record short position against Canadian dollar
  • Loonie at 73.5 cents, seen sliding
  • Oil up on Saudi-Russia comments
  • What to watch for this week
  • Pattison takes 10.1% of West Fraser
  • Cyberattack hits Asian businesses
  • Canadian home sales cool in April

Running of the Bears

The rush by speculators to short the loonie is now a thundering stampede.

The latest reading from the U.S. Commodity Futures Trading Commission shows the net short position against the Canadian dollar swelling to almost $6.3-billion (U.S.) from about $3.5-billion a week earlier.

In terms of contracts, the net short leaped to a record 86,215 from 47,704, according to the numbers, which were measured as of last Tuesday and released Friday.

That shattered the previous record net short of almost 85,000 contracts in 2007, noted Bank of Nova Scotia foreign exchange strategists Shaun Osborne and Eric Theoret.

To give you a sense of how those numbers stack up in records that date back to 1993, Friday’s report “forced us to adjust the scaling on our charts a couple of times before we could accommodate the massive increase in net short CAD activity,” said Mr. Osborne and Mr. Theoret, referring to the Canadian dollar by its symbol.

Such build-ups can pressure a currency. And in the case of the loonie, there’s already much at play, from oil prices and stark differences in the policies of the Canadian and U.S. central banks to, most recently, trade tensions and concerns over the housing market.

“Investors appear to have taken recent, adverse headlines relating to Canada’s mortgage sector fully to heart and virtually doubled the size of the bearish net bet on the CAD,” said Mr. Osborne and Mr. Theoret.

Though they didn’t name the company, there has been turmoil at Home Capital Group Inc., whose troubles have sparked angst over mortgage financing in Canada even though the issues are believed to be contained and specific to the alternative mortgage lender.

Having said that, Moody’s Investor Service did downgrade Canada’s major banks last week, citing the housing market and related, ever-rising levels of household debt.

Broader concerns over housing are, most recently, linked to inflated markets in and around Toronto, where the provincial government has now intervened.

Then there are concerns over escalating trade tensions between Canada and the U.S., which knocked the loonie when the Trump administration levied countervailing duties on our softwood lumber.

Canada, the U.S. and Mexico are also heading into negotiations over the North American free-trade agreement, which President Donald Trump has threatened to kill if he doesn’t get what he believes is a fair deal.

The loonie, which has been hovering around 73 cents (U.S.) for several days, could face “further headline risks” as this plays out, said Mark Chandler, Royal Bank of Canada’s head of fixed income and currency strategy.

“It is easy to view the housing worries and trade woes as separate events, when in fact they can be seen as two sides of the same coin,” Mr. Chandler said.

“Canada’s current account deficit – a cumulative 25.3 per cent of GDP over the past eight years – has been financed exclusively through bond inflows – totaling 31.7 per cent of GDP, with a cumulative [foreign direct investment] outflow of 6.1 per cent and negligible net equity flows – and a greater share of foreign purchases have been concentrated in corporate bonds (and financials in particular),” Mr. Chandler added in a report.

“If spreads need to widen to finance future inflows, it could lead to a tightening in current, very easy financial conditions in Canada and prove one of the mechanisms to moderate Canadian growth.”

Mr. Chandler believes the loonie will erode further, to about 71.5 cents by the end of the year.

“Extreme positioning suggests the CAD selloff may be getting frothy,” added Scotiabank’s Mr. Osborne and Mr. Theoret.

“But a quick rebound, particularly in the absence of major CAD positives (or USD negatives), should not necessarily be expected; the 2007 experience shows that the CAD continued to fall even as … investors started to cover CAD shorts.”

Oil and loonie up, stocks mixed

The loonie is getting a spark today amid a bounce in oil prices.

This came after Saudi Arabia and Russia said they believed the OPEC-Russia output reduction should continue for nine more months.

But hold that thought.

“Despite the recovery in prices, the WTI crude net futures positions continue diving,” said London Capital Group senior market analyst Ipek Ozkardeskaya.

“Hardly convinced of the mid-term market dynamics, investors continue unwinding positions off the record highs reached on February.”

The Canadian dollar rose to about 73.5 cents, as did other commodity-linked currencies.

“We caution that this was well telegraphed,” Sue Trinh, Royal Bank of Canada’s head of Asia foreign exchange strategy in Hong Kong, said of the possible production cap extension.

“The next OPEC meeting is on 25 May, and the bigger question is whether additional steps are taken, such as a bigger production cut.”

How markets ended Friday

THE GLOBE AND MAIL » SOURCE: QUANDL

What to watch for this week

We’ll have to wait until the end of the week to learn the extent to which Canadians are shopping.

And paying.

Statistics Canada is expected to report Friday that retail sales rose 0.3 per cent in March, according to many economists, while annual inflation picked up to about 1.8 per cent in April, largely because of higher prices at the gas pump.

“Inflation should firm further toward year end, as crude stages a modest comeback, and base-year impacts become more favourable for food,” said Nick Exarhos of CIBC World Markets, forecasting annual price increases will top 2.5 per cent by the fourth quarter.

Markets will also get a sense of how Canada’s manufacturing sector is faring, with some quarterly earnings reports to also digest.

Today

The earnings parade may be slowing but there’s still enough to keep us going. Watch for quarterly results from DHX Media Ltd. and Penn West Petroleum Ltd., among others.

Tuesday

A bunch of quarterly reports from retailers: Dick’s Sporting Goods Inc., Home Depot Inc., Staples Inc., TJX Cos. and Urban Outfitters Inc.

Wednesday

Economists expect Statistics Canada to report that manufacturing sales across the country rose by about 2 per cent in March from February, which, in turn, saw a dip.

“Underpinning our forecast is a broad increase in export activity, as well as upbeat signals from the labour market,” said Toronto-Dominion Bank.

“We expect the pickup in manufacturing to reflect the breadth of March export gains, though there is a risk of energy products underperforming due to the Syncrude upgrader fires, which are expected to have only a modest impact on production.”

We’ll also get quarterly results from ATS Automation Tooling Systems Inc. and Cisco Systems Inc.

Thursday

Earnings: Alibaba Group Holdings Ltd., Ralph Lauren Corp. and Wal-Mart Stores Inc.

Friday

Not much beyond Statistics Canada’s retail sales and inflation reports at this point.

So let’s go home early.

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