For loonie bears, oil slump at right time

They were squeezed after Bank of Canada Governor indicated earlier this month of likely rate hike

Slumping crude prices appear set to cut short the loonie’s best run this year. That’s music to the ears of hedge funds that are still near the most bearish on the Canadian dollar in over two decades.

The currency’s rally, fuelled in part by surprisingly hawkish comments from central bank officials this month, is on the cusp of stalling as crude prices plunge.

The currency weakened 0.4 per cent last week, after a six-week, 4.1 per cent rally that was its strongest since late last year.

Historically, the oil-sensitive currency has been more correlated to crude than monetary policy amid commodity routs.

Grim prospects

With grim prospects for when oil might climb out of its downtrend, the loonie looks poised to extend its slump as one of the worst performing major currencies into next quarter.

“The Canadian dollar, which had been blithely ignoring the latest sag in crude, has finally awoken to the oil slick,” Bank of Montreal economist Douglas Porter wrote in a note to clients last week.

“Suffice it to say if oil stays on the defensive, the loonie’s rebound is over, and the BOC is going to stay on the sidelines for a while longer yet.”

Loonie bears were squeezed after Bank of Canada Governor Stephen Poloz and his deputy Carolyn Wilkins indicated earlier this month that the BOC’s next move would likely be a rate hike, sparking the biggest two-day rally for the currency in over a year.

Yet with the outlook for oil dimming and signs inflation remains subdued, analysts and investors are pessimistic that the central bank will be able to deliver on its hawkish rhetoric. Short positions by hedge funds and other large speculators outnumbered longs by 82,881 contracts in the week through June 20, just off record bearish positioning last month.

Oil is one of Canada’s largest industries, with crude being the country’s largest export last year.

AGENCY