Looking at the latest COT report, extremes this week include crude oil and a new bearish extreme in the Swiss Franc. While long Canadian dollars looked like an extreme position last week, this is no longer the case today. This is shown below:
CFTC COT (futures & options combined) – November 7, 2017
Notable extremes are bolded, and are highlighted when speculator positioning is more than two standard deviations above historical trailing 1-year and 3-year trends. Looking at this week’s numbers, a few themes emerge from the data.
Firstly, speculators continue to short currencies that are likely to weaken if inflation strengthens further. Thus short positions are building in both the Japanese yen and the Swiss franc. Secondly, long crude oil remains a consensus favorite, and speculators have added 39,000 contracts to their net long position this week. Lastly, speculators have been dumping commodity currencies such as the Australian dollar and the Canadian dollar. Despite optimism for crude oil, the same optimism doesn’t seem to be spilling over to the Canadian dollar today.
As rate hike hopes and GDP growth fade into memory, speculators lose interest in Canada
Looking at the recent past, speculators were most bullish on the Canadian dollar just as the currency hit multi-year highs in September. At the time, we warned that the large long position in the currency meant that it was ripe for a reversal. Following our warning, the currency weakened significantly until late October, although it has recently gained some support from stronger crude oil prices. A visual overview of speculator positioning is shown below for reference:
Buy at the top and sell at the bottom?
As shown above, CAD speculators were most net short the currency in early May, just as USD/CAD rose above 1.35. At the time, 3-year z-scores were three standard deviations below historical averages. As the Canadian dollar strengthened over the summer, speculators flipped from being net short to net long. Positions then hit another extreme in September, as USD/CAD approached 1.20. Following our warning at the time, the currency is now trading within a normal range.
Looking at what’s next for the Canadian dollar, we wrote that crude oil is one of the few remaining positive catalysts for the currency in late October. At the time sentiment towards the loonie was looking overly bearish, and the currency subsequently strengthened. Today, crude oil itself is looking ripe for a reversal. Looking at the future, the currency is facing quite a few headwinds:
- The Bank of Canada’s tone suggests a neutral outlook for monetary policy
- The ongoing government fiscal stimulus program is unlikely to keep growing next year
- Sentiment towards the currency looks set to keep falling
- GDP growth is decelerating in rate-of-change terms, and
- Future support from crude oil looks tough as speculator interest in the commodity hits bullish extremes
With lots of headwinds and few reasons to buy the Canadian dollar, it’s tough to get optimistic on the currency anytime soon.