Hedge Funds Most Bearish on Loonie in Bias Bets: Canada Credit

Hedge funds are amassing record bets against the Canadian dollar on speculation the Bank of Canada will drop its bias toward raising interest rates, putting it in unison with the rest of the Group of Seven nations.

Futures contracts wagering on a decline in the Canadian dollar versus its U.S. counterpart held by so-called leveraged funds totaled C$6.3 billion ($6.1 billion) in the week ended Feb. 26, according to Citigroup Inc., citing U.S. Commodity Futures Trading Commission figures. Overall, the data showed traders reversed bets on a rise in the Canadian currency during the five-day period for the first time in eight months.

Weak exports and record debts are eroding growth in the world’s 11th-largest economy, with the slowest expansion forecast this year since 2009. Bank of Canada Governor Mark Carney remains the lone central-bank head in the G-7 suggesting a rate increase. BlackRock Inc. and State Street Canada are among the fixed-income managers speculating that Carney may drop his tightening bias when the central bank meets tomorrow, making Canadian-dollar denominated assets less attractive to international investors.

“It’s not clear the tightening bias means much in that environment,” Gabriel De Kock, head of U.S. foreign-exchange strategy at Morgan Stanley in New York, said in an interview yesterday. “Most folks believe the Bank of Canada isn’t going to raise rates this year.”

Eight-Month Low

Carney said Feb. 25 some of the risks to the economy he highlighted the prior month are materializing and policy makers are sticking to their assessment that rate increases have become less urgent than they had anticipated. The Bank of Canada has warned rates could rise in every policy decision since April.

The loonie, as the currency is known for the image of the aquatic bird on the C$1 coin, was little changed at C$1.0274 per U.S. dollar at 2:52 p.m. in Toronto, after declining yesterday to an almost eight-month low. It touched C$1.0342 on March 1, the weakest since June 29. One loonie buys 97.33 U.S. cents.

Yields on Canadian two-year government bonds fell to 0.907 percent, the lowest in nine months, on March 1 when a report showed the economy grew slower than the government forecast in January. Derivatives point to 5 basis points of easing by the central bank’s final meeting of the year, according to Bloomberg calculations based on trading in overnight-index swaps.

Median Forecast

“The foreign-exchange market is effectively pricing in Bank of Canada easing as well,” Greg Anderson, New York-based head of Group of 10 currency strategy at Citigroup, said yesterday in a telephone interview. “If they went to a completely neutral bias, where the implication is they could either hike or cut at the next change, then probably the Canadian dollar is going to weaken.”

The median forecast of 47 contributors surveyed by Bloomberg is for the loonie to trade at 98 cents by the end of fourth quarter.

Elsewhere in credit markets, Canadian Imperial Bank of Commerce, the nation’s fifth-biggest bank, issued C$1 billion of five-year notes with a coupon of 2.22 percent.

The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government was unchanged yesterday from March 1 at 127 basis points, or 1.27 percentage points, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields were little changed at 2.83 percent, the data show.

Provincial bond spreads held steady at 73 basis points, while yields declined to 2.51 percent, from 2.52 percent on March 1, according to the Bank of America Merrill Lynch Canadian Provincial & Municipal Index.

Consumer Prices

Corporate bonds have returned 1.1 percent this year, compared with gains of 0.2 percent by provincial bonds and 0.1 percent by federal government securities, Bank of America Merrill Lynch data show.

Inflation at the lowest level since 2009 and a gloomier outlook prompted Canadian Imperial Bank to delay the bank’s call for a rate increase until the third quarter of 2014 from earlier in the year. Consumer prices rose 0.5 percent in January from a year earlier, Statistics Canada said Feb. 22.

“The tightening bias is not convincing the markets that the bank is going to move anytime soon,” Emanuella Enenajor, an economist at CIBC World Markets in Toronto, said in a telephone interview yesterday. CIBC expects the central bank to maintain its bias in tomorrow’s policy statement.

‘Too Bearish’

Economists surveyed by Bloomberg predict the Bank of Canada won’t raise its 1 percent overnight target rate by this year. In January, the forecast called for a quarter-percentage point increase at the end of the year.

The Canadian currency has lost 1.2 percent this year versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes as the nation’s 25-year commodity-fueled expansion shows signs of faltering. The worst for the currency may already be priced in, Anderson said.

“The market has gotten too bearish on the Canadian dollar here going into this meeting and may get surprised the other way as there’s no change in the statement,” Anderson said. Traders will seek to unwind trades where they are running short positions versus other paired trades, triggering a gain in the loonie following tomorrow’s rate announcement, he said.

Hedge funds and other large speculators had 21,433 more bets the Canadian dollar would fall than bets it would gain, so-called net shorts, on Feb. 26, compared with 19,379 more bets it would gain, or net-longs, a week earlier, the CFTC data show.

Oil Sands

Policy makers pared their forecast for economic growth Jan. 23 when they released their last policy report to 2 percent this year from an October prediction of 2.3 percent. Economists surveyed by Bloomberg predict Canada’s economy will expand 1.75 percent in 2013, compared with growth of 1.8 percent in the U.S. and an average 1.12 percent in the Group of 10 economies.

Alberta oil remains trapped by bottlenecked pipelines, limiting an engine of growth that contributes about 15 percent of gross domestic product, the central bank said in January. The economy expanded at an annualized pace of 0.6 percent in the fourth quarter, Statistics Canada said March 1.

The differential for Western Canada Select to U.S. West Texas Intermediate was $27 yesterday. The discount reached a record $42.50 a barrel on Dec. 14.

“Traders are finding it easy to sell the Canadian dollar on any negative news or any geopolitical hiccup,” Adam Button, a currency analyst at Forexlive.com, said by phone from Montreal. “And when there is good news, the Canadian dollar rallies are minimal.”