Earlier in the week, I talked about how the underlying economics for the Canadian dollar – namely, Canada's large current-account imbalance – pointed to an inevitable weakening in the currency. The only thing holding it up, I said, was the inflow of investment money into Canadian-dollar-denominated securities – something that has left the currency highly susceptible to the fickle tastes of global investors.
Well, now we see evidence that investors are, indeed, turning their nose up at the loonie. Or, at least, the currency speculators have.
Stéfane Marion, chief economist at National Bank Financial, said in a research note the speculative traders have been selling Canadian-dollar futures in droves lately. Last week, the Chicago Mercantile Exchange's net positions in the futures (see chart) – i.e., the difference between speculative (as opposed to commercial) long and short positions – had the most severe reversal on record, swinging from a net long position of 19,379 contracts to a net short position of 21,433 contracts.
"At this juncture, speculators are short [the Canadian dollar] by the most since early 2012," he wrote.
He added that this isn't just a tale of investors rotating out of so-called "commodity currencies" – speculators remain solidly net-long the currencies of Mexico, Australia and New Zealand (although those long positions have recently shrunk sharply for Australia and Mexico). It looks as though the traders are suddenly placing a strong bet against Canada, specifically.
The last two occasions when speculators turned net-short more than 20,000 contracts on Canadian-dollar futures came shortly before slumps in the loonie – in 2008, when the currency eventually tumbled nearly 20 per cent, and 2011, when it pulled back 10 per cent.
However, we should note that the Canadian dollar is already off nearly 5 per cent since the start of the year. And Mr. Marion noted that the last time we saw the Canadian dollar net-short while the other major commodity currencies were all long was in 2006; the loonie followed that up with a stunning 30 per cent rally in 2007.
Mr. Marion suggested that the speculators abandoning the loonie may signal that we're closer to the end of the dollar's current retreat than the beginning.
"The [dollar] does look oversold," he wrote.