CAD: Markets turning more bullish

CFTC commitment of traders data showed how in July – for the first time since 1Q18 – long combined speculative positions on CAD have outnumbered the shorts (Fig. 1). This comes as investors have gradually abandoned their bearish views on CAD and slashed short positions in the past month. On 4 June, market shorts on CAD were 27% of open interest, whereas the latest numbers show net longs amounting to 6% of open interest. No other currency in the G10 space has displayed such a marked upside move in net speculative positions in the same period (Fig. 2).

Market sentiment on the loonie has been diverging compared to other commodity currencies such as the Australian and New Zealand dollars. This is likely due to the divergence in monetary policy. The Reserve Bank of Australia delivered back-to-back rate cuts in June and July while the Reserve Bank of New Zealand has maintained an easing bias after cutting in May. In contrast, the BoC has maintained a neutral policy stance. When normalising the data through rolling 1y z-scores (Fig. 2), the magnitude of CAD short-covering in recent weeks appears even sharper. This could suggest that a deeper move into net long territory is not imminent. In particular, we suspect that as long as the threat of another escalation in US-China trade tensions lingers - and given the already meaningful move in CAD in the past few weeks - investors may refrain from entering heavily bullish positions on CAD. If anything, positioning might suffer from a light downward correction in the short-term.

Yesterday's CPI numbers confirmed that robust price growth remains a strong point in favour of a neutral BoC stance on monetary policy. Headline inflation decreased from 2.4% to 2.0% in June (as widely expected), but all core measures have remained above the 2% BoC target mid-point. We believe the Bank of Canada will not decrease policy rates at least for the next 18 months, particularly when considering that:

• The BoC did not raise rates as fiercely as the Fed in the past few years and can therefore take its time before following any Fed easing
• The labour market remains tight: June’s decrease in jobs was all due to the part-time segment, while wage growth peaked
• The outlook for oil remains constructive after the OPEC+ output cuts
• The USMCA deal should soon be ratified, with reservations from US Democrat gradually fading