Canada Dollar at Almost 5-Week High as Wagers on Decline Shrink

The Canadian dollar traded at almost a five-week high against its U.S. counterpart as futures traders decreased bets on the currency’s decline before data forecast to show a second consecutive month of job gains.

The loonie, as the currency is nicknamed, fluctuated versus the greenback after a report on manufacturing in the U.S., Canada’s largest trading partner, trailed forecasts in March. The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared to those on a gain -- so called net shorts -- was 62,645 March 26 from 65,331 the week before. Canada added 5,000 jobs in March, according to the median estimate of a Bloomberg survey of 23 economists.

“There was a lot of down pressure on the loonie early in March and we’ve seen a bit of a lift in the loonie in the last couple of weeks and part of that has been driven by people covering their short positions,” said David Doyle, a strategist at Macquarie Capital Markets by phone from Toronto. “My overall thesis is that we trade down, because some of this up-move has been driven by short covering. The fact that’s taken place should give guys increased confidence that the next leg down is the next step.”

The loonie was up 0.1 percent at C$1.0168 per U.S. dollar at 5 p.m. in Toronto. The currency touched C$1.0146 per U.S. dollar March 28, the highest point since Feb. 20. One loonie buys 98.35 U.S. cents.

Bond Trades

Canada’s benchmark 10-year government bonds rose, pushing the yield down two basis points, or 0.02 percentage point, to

1.85 percent. The 1.5 percent coupon maturing in June 2023 gained 22 cents to C$96.81.

Futures of crude oil, the country’s largest export fell 0.3 percent to $96.93 per barrel. The Standard & Poor’s 500 Index of U.S. stocks lost 0.5 percent.

A quarterly report from the International Monetary Fund showed central banks increased holdings of the Canadian dollar in the fourth quarter of 2012, according to the Bank of Nova Scotia.

Central bank holdings of currencies other than the U.S. dollar, the British pound, the Swiss franc, the euro and the yen, which includes the Canadian and Australian dollars, rose

6.1 percent to $372 billion, according to the bank.

Reserve Currencies

“As long as this trend stays in place, we can extrapolate that there’s ongoing buying of CAD and Aussie for reserve purposes and that buying is significant,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia, by phone from Toronto. “That’s a significant flow for currencies like CAD and Aussie, which have much less liquidity than currencies like euro.”

The Institute for Supply Management’s factory index fell to

51.3 in March from 54.2 a month earlier, the Tempe, Arizona-based group said today. Economists projected a reading of 54 for the gauge, according to the median forecast in a Bloomberg survey.

“This could be a turning point for U.S. data generally into the middle part of the year, which has been a trend in recent years,” said Greg T. Moore, a currency strategist at Toronto-Dominion Bank’s TD Securities unit by phone from Toronto. “The U.S. has had some pretty decent data since the beginning of the year and there are some worries from the forecasters that there might be a little bit of a shift lower from that trend.”

Options Data

Options traders were the least bearish on the loonie in more than two months. The three-month 25-delta risk reversal rate fell to 0.89 percentage point, matching the lowest since Jan. 23, the day the Bank of Canada said slower-than-expected growth indicates interest-rate increases were less urgent.

The central bank’s downward revision in its growth forecast sent the loonie on a five-week decline from the week ended Feb. 8 to the week ended March 8, its longest streak of weekly drops since June.

“There was probably quite a shift in sentiment around the last couple of BOC meetings where they watered down the tightening bias, and I think that sort of qualitative, negative view probably still prevails,” said Adam Cole head of Group of 10 currency strategy in London at Royal Bank of Canada. “Canada is running quite a large external deficit and needs to fund it one way or another, and I think the market is worrying about how easy it is to finance this external funding requirement in the absence of higher interest rates.”

The Canadian dollar is up 1 percent during the past month against the currencies of nine other developed nations tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar lost 0.1 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE