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.