Loonie’s Tumble Signals Recession Bets Climbing as Bears Pile In

Updated on

Investors are piling into bets against the loonie, signaling growing speculation that Canada’s economy is heading back into recession.

The currency is close to the weakest since 2009 as the Bank of Canada meets Wednesday to decide whether to cut interest rates for a second time this year. The loonie’s decline suggests growing conviction that policy makers will continue to loosen monetary policy in the face of sliding oil prices.

In the futures market, net short positions in the Canadian dollar are the highest since the first quarter, according to data for the most recent week. Hedge-fund manager Patrik Safvenblad is among those expecting to profit from the currency’s drop.

“The biggest position for us is Canada, where the weak commodities story plays out into serious domestic weakness,” said Safvenblad, chief investment officer of Harmonic Capital Partners in London. “Canada is just all black, there’s nothing positive.”

The currency, which gets its nickname from the image of the aquatic bird on the C$1 coin, has lost about 15.6 percent against its U.S. counterpart in the past year, reaching as weak as C$1.2805 Tuesday. It’s plumbing levels last seen in March 2009, the quarter before Canada emerged from recession.

Neighborly Divide

The economy is struggling again while growth in its biggest trading partner, the U.S., rebounds.

Canada’s reliance on commodities importers including China is hurting it more than recovering U.S. demand for finished goods is helping. Crude oil, Canada’s biggest export, is almost 50 percent cheaper than a year ago.

The Bank of Canada will cut its benchmark rate by a quarter-percentage point Wednesday, after lowering it to 0.75 percent in January, according to the median estimate in a Bloomberg survey.

“I have maintained Canadian dollar shorts all year, and that is still the case,” Alessio de Longis, a currency strategist in New York at OppenheimerFunds Inc., which oversees about $235 billion, said via e-mail. “I still think Canada will need to cut rates further, possibly to zero.”

Bank of Canada Governor Stephen Poloz said in April that the worst of the oil crash was over and forecast that growth would rebound in the second half of the year. The economy contracted for the fourth straight month in April.

Strength Signals

Rising full-time employment and consumer spending may keep the bank from cutting rates for the time being, said Scott Smith, senior market analyst at Cambridge Global Payments, a global foreign-exchange and payments provider.

“There’re some pockets of strength, and that’s why I think the bank will hold off from cutting rates at this point,” Smith said from Calgary.

The currency has already weakened past the median forecast of economists surveyed by Bloomberg, for it to drop to C$1.28 by year-end. The loonie fell 0.1 percent to C$1.2743 per U.S. dollar at 8:11 a.m. in Toronto. One loonie buys 78.47 U.S. cents.

Canadian Imperial Bank of Commerce strategist Jeremy Stretch said he sees the loonie weakening as far as C$1.2960 in the event of a rate cut this week. Bank of Nova Scotia expects the central bank will keep rates steady but revise its growth forecast lower, and predicts the Canadian dollar may strengthen to C$1.2550, strategists said in a note to clients Wednesday.

Policy makers need to act to prop up growth, said Atul Lele, who manages $2 billion as chief investment officer of Deltec International Group in Nassau, Bahamas.

“You’ve got a decline in commodity prices fueling a decline in national incomes, which has started the way toward quite substantial asset price declines,” Lele said.

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