Key Takeaways
- • Leveraged funds held a net short position of approximately 91,000 Canadian dollar futures contracts, worth C$9.1bn, as of 20 October, according to CFTC data cited by FXStreet, more than double the 39,000 contracts held in mid-September.
- • Only ten weekly observations since 2006 have recorded larger bearish bets against the Canadian dollar, placing current positioning near a 20-year extreme.
- • Markets price an approximately 80% probability that the Bank of Canada will raise its benchmark rate from 2.25% to 2.50% on Wednesday, the first hike since July 2023.
- • Hedge funds are positioned for a short-lived tightening cycle as Canada lost 110,000 jobs across August and September and unemployment rose to 6.5%.
- • Asset managers, pension funds and insurers cut their aggregate net short from roughly 105,000 contracts in August to 5,400 by 20 October, diverging sharply from hedge fund positioning.
Summary
Hedge funds have increased their bearish positioning against the Canadian dollar to one of the highest levels in 20 years, ahead of an expected Bank of Canada interest rate increase, according to a report by FXStreet. Commodity Futures Trading Commission data shows leveraged funds held a net short position of approximately 91,000 Canadian dollar futures contracts, worth C$9.1bn, as of 20 October. The position has more than doubled from 39,000 contracts in mid-September, and only ten weekly observations since 2006 have recorded larger bearish bets.
The positioning comes as markets price in an approximately 80% probability that the Bank of Canada will raise its benchmark rate from 2.25% to 2.50% on Wednesday, which would be the first increase since July 2023. Hedge funds appear to be betting that any tightening will be short-lived, as weakening economic conditions constrain the central bank's ability to deliver further increases.
The domestic economic backdrop supports that view. Canada's economy lost 110,000 jobs across August and September, and unemployment rose to 6.5%. Headline inflation reached 3.1% in September, largely driven by higher gasoline prices, but the central bank's preferred underlying inflation measures remained below its 2% target.
Institutional investors have taken the opposite stance. Asset managers, pension funds and insurers reduced their aggregate net short position from approximately 105,000 contracts in August to just 5,400 by 20 October.
Attention now turns to the Bank of Canada's updated inflation forecasts and guidance on future monetary policy. A more hawkish outlook could trigger a significant short squeeze as hedge funds unwind bearish positions, while indications that further rate increases are unlikely could reinforce existing bets against the currency.
The positioning comes as markets price in an approximately 80% probability that the Bank of Canada will raise its benchmark rate from 2.25% to 2.50% on Wednesday, which would be the first increase since July 2023. Hedge funds appear to be betting that any tightening will be short-lived, as weakening economic conditions constrain the central bank's ability to deliver further increases.
The domestic economic backdrop supports that view. Canada's economy lost 110,000 jobs across August and September, and unemployment rose to 6.5%. Headline inflation reached 3.1% in September, largely driven by higher gasoline prices, but the central bank's preferred underlying inflation measures remained below its 2% target.
Institutional investors have taken the opposite stance. Asset managers, pension funds and insurers reduced their aggregate net short position from approximately 105,000 contracts in August to just 5,400 by 20 October.
Attention now turns to the Bank of Canada's updated inflation forecasts and guidance on future monetary policy. A more hawkish outlook could trigger a significant short squeeze as hedge funds unwind bearish positions, while indications that further rate increases are unlikely could reinforce existing bets against the currency.
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