Despite economic challenges, the loonie gains momentum, with traders betting on continued strength
The Bank of Canada is poised to cut interest rates for the third time this year, as the economy slows, and unemployment rises to its highest level in two years.
Despite these conditions, the Canadian dollar has experienced its best monthly gain so far in 2024. According to BNN Bloomberg, options traders expect the loonie to continue rallying, even in the face of a gloomy economic outlook.
Consumer strain is evident, with rising credit card balances, yet traders remain bullish on the loonie. Last week, options traders were the most optimistic on the Canadian dollar in 15 years, betting that it will outperform the US dollar in the coming month.
The US dollar’s broad-based weakness has played a significant role in supporting the loonie’s rise, along with other unique factors, according to Karl Schamotta, chief market strategist at Corpay in Toronto.
Short positions on the loonie have been declining, with hedge funds and asset managers reducing their bets from a peak of US$14bn earlier in August to US$8bn by the end of the month.
Schamotta suggested that bearish speculators are pulling back, indicating that the extreme short positions seen in early August may be unwinding.
The Canadian dollar climbed 2.3 percent last month against the US dollar, in contrast to its average August return of negative 0.2 percent over the past 25 years.
Since hitting its lowest point in 2024 on Aug. 5, the loonie has surpassed key technical levels, including its 50-, 100-, and 200-day moving averages in less than three weeks.
However, despite its strong performance last month, the loonie began September with a slight decline of 0.4 percent and is still down 2.3 percent year-to-date.
Among developed-nation currencies tracked by Bloomberg, it remains one of the weakest performers, leading options traders to anticipate further gains.
Traders last week were paying more for put options betting on a weaker US dollar against the Canadian dollar than for call options, an anomaly not seen since the 2008 financial crisis.
One-month risk reversals, measuring the difference between call and put options, briefly dipped below zero to levels not seen since October 2009, though they have since recovered.
Despite the optimism, Charu Chanana, head of FX strategy at Saxo Markets in Singapore, warned that the loonie could be vulnerable to a rebound in the US dollar, as yield differentials do not favour the Canadian currency.
For now, the loonie is trading in a range of 1.31 to 1.32, where it has struggled to reach over the past two years. With no immediate headwinds, it could build on recent momentum, potentially rising another 2 to 3 percent, according to Bloomberg data.
