Is it time to go long the loonie?
ECONOMY
Bets against the Canadian dollar haven’t been this high in more than a year, and U.S. President Donald Trump’s attacks on Canada’s trade practices are being blamed for the surge.
Trump’s criticism of the dairy, lumber and energy industries, along with the ongoing threat to pull out of NAFTA, have grabbed the attention of currency traders, who have pushed the net speculative short position on the loonie to 44,122 futures and options contracts.
Not since Feb. 16, 2016 have the “sharks been sniffing so much blood,” according to David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates.
Concerns about brewing issues in the mortgage market have also weighed heavily on the currency.
Lower oil prices and Friday’s soft GDP report haven’t helped matters either.
Year- to- date, the loonie is the worst- performing major currency versus the U. S. dollar.
“This is epic,” Rosenberg said in his daily Breakfast with Dave report. “It truly has no friends. Which is maybe why, being a contrarian at heart, I like it now.”
Trader positioning in the Australian dollar, another commodity- sensitive currency, demonstrates how little love the Canadian dollar is getting. The net noncommercial long position on the Aussie dollar is nearly 40,000 contracts — almost a six-month high.
The Mexican peso has moved into a net long position of 16,150 contracts, which hasn’t been seen in almost three years, the Brazilian real has a long position of 12,230 contracts, and another oil- sensitive currency, the Russian ruble, has a long position of 20,209 contracts — the highest level in 2017.
“If there is an anomaly out there, it is definitely the excessive bearish sentiment and positioning at the current time on the Canadian dollar,” Rosenberg said. “A short squeeze, for whatever reason, would go a l ong way towards generating a counter-trend rally.”
The loonie hit a 14-month low on Friday, and has been showing tentative signs of stabilizing since. In late trading Tuesday, one loonie bought you 72.88 US cents, down nearly four cents from its 2017 peak in February.
However, the risk remains to the downside as interest rate differentials continue to work against the loonie, according to Shaun Osborne, chief FX strategist at Scotiabank.
He pointed to Bank of Canada governor Stephen Poloz’s speech in Mexico City on Thursday, which is expected to address the uncertainties in recent policy statements from the central bank.
Osborne warned that this could lead to additional pressure on the loonie via additional negative sentiment.
“Measures of implied Canadian dollar volatility are rising steadily, and risk reversals are pricing in a relatively high premium for protection against downside risk,” the strategist told clients. “The absence of near- term domestic releases leaves the Canadian dollar vulnerable to the broader market tone, and we remain bearish.”
The loonie has been unable to take advantage of the U. S. dollar’s weakness this year, as the trade- weighted greenback posted its fourth consecutive monthly decline in April.
Improving global economic data has raised the prospect of other major economies following the U.S. Federal Reserve on the path to interest rate hikes.
However, if upcoming Canadian data demonstrates a s harp moderation in growth following the blockbuster first quarter, National Bank Financial economist Krishen Rangasamy thinks the l oonie could remain under pressure over the coming months.
“But not all is bleak for the Canadian dollar,” he said. “We expect a more hawkish tone from the Bank of Canada later in the year in response to a second half rebound and the need to cool a hot housing market.”
As a result, Rangasamy pushed forward his forecast for when the loonie will hit a trough by three months to the third quarter.
“That forecast, however, assumes U. S. trade policy does not take a turn for the worse,” he said. “Protectionist policies could indeed cause the greenback to appreciate sharply if they have the desired effect of improving the U. S. trade balance and the undesired effect of spooking investors worldwide and increasing safe haven flows.”