"Loonie Longs Are Set For A Painful Dose Of Reality": Trader

Is all hell about to breaks loose for Loonie longs?

Yesterday, Bank of America released a note titled simply enough "CAD longs at risk", in which it said that "according to our liquid cross border flow (LCBF) data, hedge funds and real money now appear to be in the process of selling out of extended CAD longs after having been consistent buyers since the summer." The Bank said that this represents an important directional shift and explained as follows: 

As argued last month, risks remain sharply skewed to the upside in USDCAD over the next few months based largely on supportive US vs. Canada fundamentals and CAD position liquidation potential. Based on confirming trends in the LCBF data, we are more comfortable with our position liquidation thesis and continue to expect a retest of 1.33.  Hedge funds began buying CAD after BoC Senior Deputy Governor Carolyn Wilkins delivered an upbeat assessment of Canada's economic economy on June 12, marking the beginning of a pivotal shift in the BoC's policy stance that ultimately saw the two emergency rate cuts of 2015 reversed in the July and September meetings. Hedge funds were net buyers of CAD in 13 of the 15 weeks following that speech, amassing a large cumulative position that peaked the week of November 17. In the three weeks since, roughly 40% of hedge fund longs in CAD have been liquidated.

As a result, BofA thinks that the risk is that real money follows the hedge fund lead and initiates the position squaring process, and added that "after unprofitably fading the Wilkins speech in the back half of June, real money began aggressively building long CAD positions from July through September, a period over which 80% of its peak cumulative long CAD position recorded on November 24 was put on. Although real money sold CAD over the last two weeks, our calculations indicate that 95% of the position remains, nearly half of it established at levels below 1.25 and thus susceptible to liquidation pressure if USDCAD were to appreciate on supportive fundamentals as we expect over the near term. Note that CFTC data similarly suggest extended CAD long positioning at risk of reversion (Chart 2)."

This negative sentiment carried over overnight into the latest note by former Lehman trader and current Bloomberg commentator who writes in his latest Macro View that "Loonie Longs Are Set for a Painful Dose of Reality." Here's why:

After seven weeks of consolidation, the Canadian dollar is due for another major leg of weakness. 


FX traders aren’t paying attention to what’s happening to Canadian oil markets but they’ll be forced to wake up soon enough. The price the country gets for its oil is collapsing due to problems with the Keystone pipeline and a rail bottleneck.


Bear in mind, this is at a time when oil prices globally are bid to boots. This may only be a temporary problem, but the price dislocations are sizable enough to cause a real impact.


Canada’s terms-of-trade are very much dependent on this oil contract and so they’re plummeting in sympathy. That’s going to force investors to reassess Canada’s fundamentals.


It’s an indebted economy, with a structural current-account deficit and growth that’s set to slow sharply in 2018. Household debt surpassed GDP last year, IMF data show. Amid the G-10, only the euro zone and Sweden are forecast to have higher unemployment rates next year.


The speculative market is still long CAD to an extent last seen just before the currency’s spectacular collapse in 2013, CFTC positioning data show. Why exactly?


This isn’t the time of year when complacency gets rewarded