This appeared in the Globe & Mail on June 9. I spoke with the about the extreme positioning in USD/CAD and how it was a signal that the speculators were about to get blown out.
USD/CAD was trading above 1.35 then. In the following 6 weeks, it fell 10 full cents.
Loonie options pricing may signal bad news for currency’s bears
The foreign exchange options market is showing much less risk of a sharp drop in the Canadian dollar than before last November’s U.S. election, which could spell bad news for speculators who have heavily shorted the underperforming currency.
Bearish bets on the loonie ramped up in May to a record high as Canada’s largest alternative lender Home Capital Group Inc nearly collapsed in April
But short-sellers are battling a decline in volatility that has hit stock, bond and foreign exchange markets over recent months and which implies that the Canadian dollar will not fall very far. The decline in volatility could leave sellers sitting on positions that are no longer working and looking for an exit all at once if a positive catalyst for the currency emerges.
“Canadian dollar sellers are expecting an aggressive Canadian dollar move and the market is saying it is not going to happen,” said Adam Button, currency analyst at ForexLive.
Investors typically pay more in the options market for downside than upside protection in the Canadian dollar because the commodity-linked currency tends to weaken fast when appetite for risk declines.
I spoke with Reuters ahead of data on Canadian CPI and retail sales.
TORONTO (Reuters) – The Canadian dollar extended a 14-month high against its U.S. counterpart on Thursday as oil prices rose and the greenback fell against a basket of major currencies, with analysts looking to Friday’s domestic data for clues on the rally’s next move.
The loonie, as the currency is colloquially known, has strengthened steadily since June, when the Bank of Canada took a more hawkish turn, with the move getting fresh legs after the central bank hiked interest rates last week.
At the time, the central bank said it needed to look through soft inflation data and would wait for more economic data before committing to its next move, making June inflation and May retail sales data due out on Friday key to the short-term trend. ECONCA
“The Canadian dollar is riding high, but it won’t last forever, and any signs of weakness in inflation and in consumer spending could cause a sharp reversal,” said Adam Button, currency analyst at ForexLive in Montreal.
I spoke to the CBC on July 20 about the Canadian dollar ahead of the BOC. Everyone was saying a hike was priced in. It wasn’t.
If you’re planning a summertime trip to the U.S., keep a close eye on the loonie next Wednesday. That’s when the Bank of Canada is widely expected to increase interest rates, a move that generally attracts foreign investment and boosts demand for a currency, pushing that currency’s value higher.
The Canadian dollar was worth 77.61 cents US on Friday after rising by slightly more than 0.6 of a cent. Exactly how high could the loonie fly after the Bank of Canada makes its anticipated move?
“There’s still room for the Canadian dollar to gain,” said Adam Button, a currency analyst with ForexLive.com. Button expects the loonie to head close to 78 cents after an interest rate hike, and as high as 80 cents over the following month.
Currency traders started gaining confidence that the bank would finally pull the trigger on interest rates after reading bullish remarks in a speech by Bank of Canada senior deputy governor Carolyn Wilkins on June 12, said Button.
That confidence was reinforced by comments made by Bank of Canada governor Stephen Poloz in a June interview on CNBC, and in a recent interview with a German newspaper.
I spoke with Reuters about CAD positioning on Jan 29, 2016.
Bearish bets on the Canadian dollar rose this week to the highest in five months, Commodity Futures Trading Commision data showed on Friday, as steady Bank of Canada policy an and oil price recovery failed to shake speculation against the currency.
Net short Canadian dollar positions increased to 66,819 contracts in the week ended Jan. 26 from 66,386 in the prior week. That is the most extreme net short position since August last year.
“Changing the speculative mindset is like turning an ocean liner,” said Adam Button, currency analyst at ForexLive in Montreal.
The currency has rebounded 5 percent from a 12-year low after the Bank of Canada surprised many traders last week and left its policy rate on hold at 0.50 percent.
A rebound in crude oil prices of more than 25 percent from 12-year lows has been a major driver. The risk-sensitive commodity Canadian currency has also benefited from dovish tilts by the European Central Bank and the Federal Reserve, as well as a Bank of Japan rate cut into negative territory.
“These (short) positions were built at much better levels,” said Button. “The long-term speculative bets against the Canadian dollar can easily ride out a six-cent rebound.”
To be sure, the currency could rally further, raising pressure on speculators to pare positions.
“If we continue to see the Canadian dollar rally then some of those shorts will probably be covered,” said Jack Spitz, managing director of foreign exchange at National Bank Financial.
But investors may be better off selling into any near-term Canadian dollar rally, said Bipan Rai, director of foreign exchange strategy at CIBC Capital Markets
1.The trend is your friend
2.Everyone has a plan until they get punched in the face
3.Men who pick bottoms get smelly fingers
4.Beware of complex ideas. More trades have been ruined by making them too complex rather than too simple.
5.Half of everything (or more) we believe will be obsolete in the next 45 years
6.Never, under any circumstance add to a losing position…. ever!
7.If you start to see conspiracies, stop trading
8.Physical health, mental health and good trading are brothers
9.Time is on your side, You haven’t “missed” anything
10.If you feel ‘hope’, you’re in a bad trade
11.Never take tips
12.Living to fight another day is the most important trade
Canadian dollar slips on crude weakness, Fed rate signals
By Alastair Sharp
TORONTO, Nov 12 The Canadian dollar tumbled to its weakest in six weeks against the U.S. dollar on Thursday before paring some losses, as falling crude oil prices and mixed messages from the Federal Reserve on U.S. monetary policy heightened investor jitters.
The loonie, as Canada’s currency is colloquially known, gyrated sharply, with its strongest level of the session notched at C$1.3225 and its weakest at C$1.3342. A heavy slate of appearances by Fed policymakers mostly lined up behind a likely December interest rate hike, although one top official said it could be well into 2016 before an increase is justified.
“Playing this game of deciphering Fed messages is leading to frustration and uncertainty from the market, and that manifested itself today,” said Adam Button, currency analyst at ForexLive in Montreal. “Uncertainty breeds contempt.”
Button expects to see the Canadian currency at C$1.40 by mid-next year as oil production continues to outpace demand and the Fed possibly raises rates multiple times. “It’s only a matter of time until the weakness in oil clobbers the Canadian dollar,” he said.
Oil prices tumbled almost 4 percent on Thursday, accelerating a slump that threatens to test new six-and-a-half year lows.
The Canadian dollar settled at C$1.3282 to the greenback, or 75.29 U.S. cents, weaker than Tuesday’s official close and Wednesday’s 4 p.m. (2100 GMT) reading of C$1.3265 rate, or 75.39 U.S. cents.
A sharp drop in China’s October bank lending fed concern about the global growth outlook. It follows weak trade, inflation and industrial production data from China this week that has weighed on commodity markets.
Canadian government bond prices were higher across the maturity curve, with the two-year up 2.5 Canadian cents to yield 0.649 percent and the benchmark 10-year up 5 Canadian cents to yield 1.703 percent.
Bank of Canada Senior Deputy Governor Carolyn Wilkins will speak in Toronto on Friday morning, addressing the topic “Innovation, Central-Bank Style.”
Investors will also be looking forward to U.S. retail sales data on Friday.
Central banking is built on an outdated idea that could prove to be the undoing of the global economy.
Disastrous models are built on simple assumptions.
That idea in central banking is to target inflation in goods and services. The consumer price index is the holy grail of inflation watchers.
Here is the assumption, here is the part where it works in the model, heck it even worked in practice in the 20th century world. The assumption is a rising CPI is driven by domestic demand. The assumption is that workers are making more in a hot economy and buying up scare goods. Because the economy is expanding those workers will be asking for wage hikes and before you know it you have a wage-price spiral.
In a globalized world, that assumption is wrong. Inflation is coming from currency weakness, bubbles like housing and commodity shortages. Almost any non-commodity good can be produced in near-unlimited quantities at far below the cost of manufacturing. A factory in China can re-tool to produce more in a month so there’s hardly even a lag.
Meanwhile, inflation is non-existent in wages. Real median household income in the US is 8.3% lower than in 2007 — that’s wage deflation at more than 1% per year.
The borrowing function is also broken
Central banking models work great in a localized economy when central bankers could choke out domestic inflation or spur the local market with interest rates. The idea of low interest rates is that it gives companies and incentive to borrow and invest. Globalization has changed the model: borrowing is done in the US and investing in China and the developing world.
Picture yourself owning a corporate in the United States: the Fed cuts rates so now your borrowing at cheaper levels. You’re ask workers to take a pay cut because the economy suffering or you announce layoffs.
You refocus on selling globally where economies are stronger and eventually the economy picks up. Soon you have some pricing power for your product and business is good. You raise prices and that creates some domestic inflation.
In the meantime you’ve opened new markets. It’s time to invest so what do you do? Borrow money in the US and expand where there is growth and where wages are cheapest. One thing you don’t do is hire back those workers or give them a raise. No way, no how, no chance. If the Fed burns another $3 trillion to knock 80 basis points from long-term rates it doesn’t change the equation. If you need to replace skilled workers, hire a new graduate with $100K in debt and train him. He’ll work for whatever you want with those monthly payments looming.
The Fed has the power to create inflation but it can’t create wage inflation in a globalized world. At the same time, Fed-fuelled bubbles have pushed up the prices of hard assets and devalued the currency so it hits workers on both sides.
Governments should be targeting wage inflation
Japan has been fighting this conundrum for more than 20 years. The only way the central bank has been able to stimulate the economy with quantitative easing is by devaluing the currency. Even then, a 30% decline in the yen last year only created 1.7% growth and 0.3% inflation.
They have tried everything to create inflation and prices are still well below 2008 levels.
What’s Japan doing now? It’s targeting wage inflation. In the spring tax package Prime Minister Abe will offer tax breaks for companies that increase total wages of workers by more than 2%. The government is also trying moral and nationalistic persuasion.
For sure these are clumsy first attempts but they will be the future of inflation targeting.