Investors hate the Canadian dollar

Investors are betting against the Canadian dollar in a big way. Short positions on the loonie have grown to record levels, according to data from the U.S. Commodity Futures Trading Commission. This means investors are looking to profit off a decline in the value of the loonie, relative to the U.S. dollar.

The Canadian dollar has stumbled by around 3 per cent this year and trades at roughly 73 US cents. There are several things working against the currency of late, said Karl Schamotta, chief market strategist at Corpay Inc., a foreign exchange and payments firm. A major contributor is the divergence in monetary policy: Canada has started to lower interest rates, while the United States has not.

Mr. Schamotta said that bearish bets on the loonie may be overblown and that speculative positioning is useful as a contrarian indicator. When a trade is “too obvious and too crowded, that sort of raises suspicion about how long it can last,” he said.

Even so, Mr. Schamotta said he’s “fairly bearish” about the Canadian dollar over the long-term. Furthermore, traders are using currency markets to communicate their pessimism about the economy’s direction.

“The views of investors around the world on the Canadian economy’s prospects have dimmed pretty substantially,” he said. “They’re very much aware that this is one of the most rate-sensitive economies in the world. They’re betting against Canadian household consumption and assuming that we’re going to see further weakness in the years ahead.”

Decoder is a weekly feature that unpacks an important economic chart.