Hedge Funds Extend Bearish Loonie Bets Post-Fed to 4-Month High

2016: What to Expect in Currency Markets
  • Positioning after U.S. rate increase suggests more weakness
  • Odds of a Bank of Canada rate cut are rising with oil weak

Hedge funds and other large speculators increased bets the Canadian dollar will drop against its U.S. peer in the wake of the Federal Reserve’s first rate increase in almost a decade as renewed weakness in crude oil weighed on the domestic outlook.

Positions that profit from Canadian-dollar weakness outnumbered those in its favor by 56,027 contracts in the week ending Dec. 22, the biggest net-short position in the market since the final week of August, according to data released Monday by the Washington-based Commodity Futures Trading Commission. It’s the first hint of how the market positioned itself following the Fed’s quarter-percentage-point rate increase on Dec. 16.

"There’s definitely more downside," said Emanuella Enenajor, senior economist at Bank of America Merrill Lynch, by phone from New York. "We’ve seen weakness in the price of oil and increased concerns about the Bank of Canada easing in the new year."

Enenajor forecasts the Canadian dollar reaching C$1.45 per U.S. dollar in the first three months of 2016. The currency traded at C$1.3926 as of 7:49 a.m. in Toronto.

Since the Fed’s move, the Canadian dollar has fallen to an 11-year low of C$1.4001 per U.S. dollar, as crude oil, until this year the country’s largest export, resumed its descent and early data on economic growth in the last three months of 2015 came in weaker than expected.

That’s in turn seen the market increase odds the Bank of Canada will have to cut its own interest rate a third time following the oil collapse that has erased more than half its value since last year. The odds of the central bank cutting rates down to its record low 0.25 percent by the end of next year stand at about 37 percent, according to Bloomberg calculations based on trading in overnight index swaps.

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