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 bearsThe 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.