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.”
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$1.0263 per U.S. dollar at 8:40 a.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 97.44 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 12.8 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.
“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.”