The loonie should beware of Fridays (Thursdays, too)

The loonie has been having a tough year.

After being the bestperforming currency against the U.S. dollar in 2021, it has slipped down the charts in 2022.

Tuesday, the Canadian dollar was trading at 77.02 US cents, a low not seen since November 2020. Speculators have slashed their bullish bets for the currency. As of last week, net long positions had fallen to 9,029 contracts from 20,881 the week before, Reuters reports.

A lot of it has to do with a very strong U.S. dollar and, in a fascinating note, Bank of America strategists explain why this year Fridays and Thursdays are the worst days of the week for Canada’s currency.

Unlike the loonie, the U.S. dollar, which tends to be seen as a safe haven in uncertain times, has been having a great year. Energy and commodities are the only major asset classes in the U.S. to outperform it, say Bank of America strategists Howard Du and Vadim Iaralov.

The greenback has rallied about eight per cent against other G10 currencies and Du and Iaralov found that most of those gains in 2022 were made on Thursdays and Fridays, with cumulative returns of 1.9 per cent and 2.2 per cent, respectively.

These also happen to be the days that U.S. stock markets saw their biggest selloffs, racking up cumulative losses of -10.6 per cent on Thursdays and -7.9 per cent on Fridays.

“In our view, investors are more reluctant to hold risky assets over the weekend due to (1) the ongoing war in Europe, (2) the withdrawal of central bank liquidity increasing price gap risks, which supports demand for the USD,” said the strategists.

Wednesdays tend to be weaker days for the greenback, especially Fed Wednesdays. The strategists think this is because investors buy the USD ahead of what are expected to be hawkish FOMC meetings, “sell the fact” on the day and then buy in again as uncertainty remains high.

Stock markets tend to have their best days on Monday afternoons, after the selloff on the previous Thursday and Friday.

So how does all this affect the loonie?

The strategists say that, across major G10 and emerging market currencies in 2022, the Canadian and Australian dollar have the closest relationship to U.S. equity markets.

“These two currencies have also had the greatest loss against the USD on Thursdays and Fridays, coinciding with the bearish day-of-week seasonality for the U.S. equity market,” they said.

The cumulative losses year to date for the Canadian dollar were -1.2 per cent and -2.5 per cent on Thursdays and Fridays, and Bank of America says there is risk of more losses in equity routs to come.