Hedge funds bet most against Canadian dollar in almost five years

In a recent report from the Commodity Futures Trading Commission, speculators have significantly increased their bearish positions on the Canadian dollar, reaching the highest net short positions in almost five years. The data reveals that leveraged funds raised their bets against the loonie to 51,971 contracts in the week ending December 19, marking the highest level since January 2019 and a notable increase from the previous week’s 37,707 contracts.

The heightened bearish sentiment towards the Canadian dollar coincides with broader concerns about the country’s economic performance. The unexpected contraction in the third quarter and the prospect of consecutive declines have raised apprehensions among investors. This, coupled with persistent inflationary pressures and lackluster economic growth, has fueled the pessimistic outlook reflected in the increased short positions on the loonie.

Brad Bechtel’s observation about the substantial short base on the Canadian dollar underscores the broader trend of skepticism towards pro-cyclical G-10 commodity currencies throughout the year. The Australian dollar, Norwegian krone, and the Canadian dollar have all faced headwinds as global economic uncertainties persist.

The Bank of Canada’s cautious approach, as articulated by Governor Tiff Macklem, adds an interesting dimension to the situation. Macklem’s insistence on waiting for clear evidence of inflation easing before considering rate reductions suggests a commitment to maintaining stability in monetary policy. This stance may impact the market’s expectations and further contribute to the prevailing narrative surrounding the Canadian dollar.

As markets continue to navigate uncertainties, the dynamics of the Canadian dollar will likely remain a focal point for traders and analysts. Economic indicators, central bank communications, and global macroeconomic trends will all play crucial roles in determining the trajectory of the loonie in the coming weeks and months.

Investors and policymakers alike will closely monitor developments, seeking clarity on the factors influencing the Canadian dollar’s performance. The heightened level of short positions reflects a cautious stance, but the evolving economic landscape and potential policy adjustments could introduce new variables into the equation, shaping the future direction of the currency.

Brad Bechtel, the global head of foreign exchange at Jefferies LLC in New York, commented on the situation, stating, “The Canadian dollar short base is still substantial as inflation remains stubborn and growth lackluster.” He further highlighted that the market has maintained a bearish stance on pro-cyclical G-10 commodity currencies throughout the year, including the Australian dollar, Norwegian krone, and the Canadian dollar.

Despite being part of the Group-of-10, the Canadian dollar has underperformed its peers in the current quarter. The unexpected contraction of the Canadian economy in the third quarter and the potential for a narrowly avoided second consecutive quarter of declines have contributed to the negative sentiment. However, Bank of Canada Governor Tiff Macklem has indicated that policymakers require evidence of inflation easing before considering rate reductions, providing an additional layer of complexity to the evolving market dynamics.