Canadian dollar bearish bets reach highest in five months

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


12 of my favourite trading rules

12 great forex trading axioms

Some are sayings I’ve picked up along the way, some are rules I live by. Here’s to a great 2016.

Originally posted at ForexLive.

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

Go to ForexLive for the best forex education


My CAD view in Reuters interview

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.

Why central bankers are completely wrong about inflation

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.

US real median household income in 2012 dollars
US real median household income in 2012 dollars

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.

students no layoffs

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

Japanese PM Abe
Japanese PM Abe

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.


What Are Yields Yelling

The bond market flashed warning signals on Friday and we look at what it could mean for FX. Last week, the pound was the top performer while the Canadian dollar lagged badly on  5 consecutive days of declines. The Asia-Pacific calendar is light to start the week.

USD/CAD continued to move higher in early-week trading, hitting 1.0910 from 1.0888 at the open. Otherwise, action has been light as the week gets under way.

Last week ended with US non-farm payrolls casting doubt on the strength of the US economy heading into 2014 and the report sparked some sizeable moves across assets, including a slump in the US dollar. The moves that really stood out were in the bond market as yields tumbled.

Five-year yields fell 13 basis points to 1.62% and 30s fell 8 bps to 3.80%, below the yield when the Fed announced a taper on Dec 16. The magnitude of the declines in yields should not be taken lightly, it’s either a squeeze on of over-ambitious shorts or it’s signaling a flight to quality that could spill over and lead to declines in stocks and USD/JPY.

The market is complacent in the view that economic growth will pick up toward 3% in 2014, businesses will begin to invest and inflation will track higher. That’s a reasonable line of thinking but it hasn’t been confirmed by data and significant risks remain.

Weekend news was mostly inconsequential but there was positive news from Iran where negotiators struck a nuclear deal that lifts restrictions on oil exports. The move could weigh on oil prices, especially Brent.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by – long by +.
EUR +14K vs +31K prior
JPY -129K vs -135K prior
GBP +18K vs +23K prior
AUD -57K vs -57K prior
CAD -61K vs -58K prior
CHF +5K vs +11K prior

The market has struggled to build any significant positions in euros because of the lack of consistent trend. The move toward neutral came after the break of the 55-dma but Friday’s rebound likely confused traders further.


The Fed is wrong about the falling unemployment rate

On Nov 1, St Louise Fed President James Bullard lauded the US labor market and said the decline in labor force participation that has improved unemployment is a result of natural demographic changes. That simply isn’t the case.

I wrote about why the Fed is wrong about unemployment in a post in October.

Why the Canadian jobs market is much healthier than the US and why the Fed is wrong

Canadian unemployment is listed at 6.9% while in the US it’s 7.3% but that vastly understates the differences in the health of the relative jobs markets.

First of all, if you go back to pre-crisis times, Canadian employment was around 6% which is something akin to full employment by Canadian standards. Before the crisis in the US, unemployment was at 4.5%. Differences in how the countries measure unemployment, helps to explain the gap.

Skipping ahead to the present, Canada is now 0.9 percentage points away from pre-crisis unemployment levels while the US is 2.6 percentage points off.

Alone that’s an interesting story but it’s not even the kicker. The real story is in the participation rate. In Canada, the pre-crisis average was around 67.4% while in the US it was about 66.1%. Today, the Canadian participation rates has fallen by 1 percentage point while in the US it’s down 2.9 percentage points.

Canadian participation rate chart 2013

It’s been a much steeper fall in the US.

US participation rate chart 10 years

The nail in the coffin is demographics

The Fed has repeatedly pointed to demographics (ie older people retiring) as the reason for US workers exiting the workforce but US and Canadian demographics are very similar. What’s more is that based on demographics you would expect more Canadian workers to be leaving the workforce than the US.

The marginal worker leaving the workforce is 55-65 years old. In the US, the 55-59 year-old cohort is around 10% of the population; in Canada it’s 12%. In the US, 60-64 year olds are 9% of the total while they’re 10% in Canada.

US population pyramid


Canadian population pyramid

What does it mean?

A conservative (albeit simplistic) estimate would put Canadian unemployment around 3.8 percentage points healthier than the United States, far more than the 0.4 percentage point difference in official rates.

More importantly for traders, it shows that the Fed is vastly overestimating the health of the US labor market. It suggests that far more workers are leaving the US jobs market for reasons other than retirement/demographics — they’re likely discouraged workers.

What’s more, despite the large differences in employment, Canada doesn’t have any signs of inflation. The Fed may (and probably should) taper due to the financial risks of holding a $3.6 trillion balance sheet but any argument about tapering due to improved employment or inflation risks is a canard.


Economists only care about one kind of inflation — and it’s not coming

Economists  don’t care about rising prices

If your gas or grocery bill is higher, it doesn’t matter to central bankers. What they dread is a wage-price spiral. That’s a fancy way of saying they don’t care about inflation as long as it doesn’t mean higher wages. If prices rise without corresponding demands for higher wages, it’s a finite move — consumers will eventually have no more money to spend. If wages rise along with prices the cycle can be endless and they need to halt it.

The thing that inflation bugs miss is that wages aren’t rising, in many cases they’re going to other way. MarketWatch profiles American Axle as a symptom of the Michigan manufacturing industry.

Base pay for new hires at Axle in Three Rivers is $10.50 per hour, half the going rate of 10 years ago.

Does that sound like inflation? The story also talks about ‘huge turnout’ at a company job fair for those positions.

Globalized manufacturing has been a tremendous force to keep consumer goods cheap but it’s also leading to major competitive pressures on US wages.

This was originally published at ForexLive on August 20, 2013


Foreign exchange analysis from Adam Button