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Increased Short Activity Noted Around the Canadian Dollar Lombardi Letter 2017-09-07 02:14:20 Canadian dollar Bank of Canada rate hike U.S. Federal reserve Fed Loonie U.S. dollar American dollar dollar Currency speculators are betting against the Canadian dollar. News https://www.lombardiletter.com/wp-content/uploads/2016/11/Short-Speculators-Have-Found-an-Easy-Target-in-the-Canadian-Dollar-150x150.jpg

Increased Short Activity Noted Around the Canadian Dollar

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Short Speculators Have Found an Easy Target in the Canadian Dollar

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Short Speculators Have Found an Easy Target in the Canadian Dollar

Speculators have targeted the Canadian dollar (also known as the “Loonie”) and they are betting against it. It now takes just US$0.74 to buy CA$1.00.

The pressure is on, and that difference in value could grow further apart. The U.S. Commodity Futures Trading Commission’s latest report has clearly shown that speculators are shorting the Loonie to the tune of $1.6 billion, the highest in months. (Source: “Speculators raise their bets against the Canadian dollar in ‘capitulation’,” The Globe and Mail, November 15, 2016.)

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The short numbers go back to November 8, the day when Americans gave Donald Trump the keys to the White House.

If the number of shorts hasn’t shown an especially alarming rise, it has confirmed where the Loonie is heading. Low interest rates in Canada, low oil prices, and a stronger American dollar have all contributed.

But that U.S. dollar could be about to receive further upward pressure in December, given the ever more favorable rumors from the Fed about a rate hike. That could prompt the Bank of Canada to follow suit to prevent the Canadian dollar from further losing value compared to the U.S. dollar.

The Bank of Canada might not follow the U.S. Federal Reserve’s program in its decision on interest rates, regardless of the impact, said the Bank of Canada (BoC) governor, Timothy Lane. (Source: Ibid.)

Lane stressed that the BoC can adjust its key rate according to its own economic situation, thus it does not have to be in step with the U.S. Fed. Still, Lane said the BoC would certainly take a Fed key interest rate hike, and other factors, into consideration to determine the future of its own monetary policy.

A rise in interest rates in the United States could have a domino effect. Many central banks around the world might be tempted to raise interest rates. But the BoC believes that the Fed would raise interest rates only if the U.S. economy shows solid evidence of growth. This tends to favor Canadian exports.

That’s why the BoC does not seem overly concerned by the prospect of an even-lower Loonie. That may also explain the increasing short bets. The latest Fed increase in the key rate dates to December 2015 and it was no more than 0.25%. The BoC’s key interest rate currently stands at 0.5%. The central bank lowered it twice last year.

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