Market Analysis

Long CAD Positioning Vulnerable?

According to data released last Friday by the US’ Commodity Futures Trading Commission, the size of the net long Canadian dollar position versus the greenback had increased to 75,128 contracts or the week ending October 3, up from 74,605 for the seven days that ended on September 26. With each contract equivalent to CAD 100,000, 75,128 contracts equates to a short USDCAD position in the region of USD 6 billion. Writing on Monday, US bank BNYMellon argued that the size of the perceived long CAD position in the market might leave the Canadian currency potentially vulnerable especially as, in the US firm’s view, much of that exposure was built up in a relatively short while over the summer at a time when the Bank of Canada (BOC), which raised rates both in July and September, was arguably exhibiting a more hawkish tone than is currently the case.

More recently Canadian economic data has been somewhat more mixed, inflation remains somewhat subdued (though admittedly creeping a little higher) and the oil price, which might be expected to support the value of the CAD, has traded sideways. At the same time, US economic data and the tone of Fed speakers has reinforced a view in the futures market that the US central bank is very likely to hike again in December, even as the BOC may be inclined to take a more wait-and-see approach. BNYMellon feels current positioning could be tested if USDCAD probed the late August high of 1.2662. Whether traders agree is another matter..

Written by Neal Kimberley, External Currency Analyst.