Speculators have reversed bets that helped make the Canadian dollar the worst performer in the developed world, with sentiment swinging in the currency’s favor for the first time in 16 months as inflation quickens.
Futures wagers by hedge funds and other large speculators for the Canadian dollar to rise against its U.S. peer, or net longs, outnumbered bets for it to fall last week for the first time since Feb. 22, 2013, according to July 4 data from the Commodity Futures Trading Commission in Washington. As recently as January, net shorts outnumbered net longs by 70,327 positions, approaching the most since 2007.
The Canadian dollar touched a 4 1/2 year low in March as Bank of Canada Governor Stephen Poloz said he couldn’t rule out interest-rate cuts to head off the dangers of low inflation. With the latest consumer-price index rising above the central bank’s target for the first time in more than two years, speculation is growing Poloz may change his stance.
“Inflation is coming through, and the debate is, will the Bank of Canada recognize that? How long can it ignore that?” said Jane Foley, senior currency strategist at Rabobank International, by phone from London. “The market anticipates that the the Bank of Canada is tightening ahead of the Federal Reserve. You can imagine the Canadian dollar would rally versus the U.S. dollar.”
The loonie, as the Canadian dollar is nicknamed for the image of the aquatic bird on the C$1 coin, was little changed at C$1.0663 per U.S. dollar at 12:17 p.m. in Toronto. It reached C$1.0621 per U.S. dollar on July 3, the strongest since Jan. 6, after touching C$1.1279 on March 20, the weakest since July 2009. One loonie buys 93.78 U.S. cents.
Canada’s dollar fell the most in the past 12 months in a basket of 10 developed-nation currencies tracked by the Bloomberg Correlation Weighted Index, dropping 5.8 percent.
A rally would defy economists’ median forecast in a Bloomberg survey for the loonie to weaken to C$1.13 per U.S. dollar by the middle of next year. Separate surveys show both Canadian and U.S. growth at 2.2 percent in 2014 before the U.S. pulls ahead for the following two years.
The consumer price index rose 2.3 percent in May from a year earlier, Statistics Canada reported June 20. It was the first time the gauge exceeded the Bank of Canada’s 2 percent inflation goal since February 2012. The central bank has kept the benchmark interest-rate target at 1.0 percent since 2010. Higher interest rates tend to strengthen a currency as capital from investors seeking higher returns is drawn into the country.
Traders were net-long on the loonie by 2,695 contracts as of July 1, according to the CFTC data. Net-short positions reached 75,913 in April 2013, the most since February 2007.
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