CAD to USD: Why Hedge Funds See More Downside for Canadian Dollar

CAD to USDCAD to USD Hedge Funds Shorting the Loonie

The recent change in the U.S. Federal Reserve’s monetary policy is emanating the worst ripple effect toward our neighbors to the north. The CAD to USD exchange rate has hit a rough patch, wherein the loonie is seemingly facing a perpetual decline against the greenback. Worse yet, hedge funds are now jumping the Canadian dollar ship.

Canadian newspaper The Globe & Mail reported this week that hedge funds are shorting the Canadian dollar. According to data released by the Commodity Futures Trading Commission (CFTC), the number of futures contracts betting on the decline of the CAD/USD pair far outnumber the ones betting on its rise. (Source: “Hedge funds increase their bets against the loonie,” The Globe & Mail, December 28, 2015.)

That means the market may have largely found a consensus on the future movement of the CAD/USD rate—that is, a slump in the Canadian dollar is now inevitable.

The economic woes of America’s northern neighbor, initiated by the declining oil prices, have further mounted after the Federal Reserve raised rates this month. Making matters worse is the speculation that the Bank of Canada will go for rate cuts in the coming days, which will place further downward pressure on the loonie.


The premise is simple: the disparity in the rates will trigger the flight of investment capital from Canada to the U.S.

In fact, it is also rumored that the Canadian central bank may eventually go for negative interest rates. This speculation is in line with the Bank of Canada’s past rate cuts, which have all supported falling oil prices.

It is understandable, since the Canadian dollar’s fate is closely tied to oil prices due to the country’s heavy economic reliance on oil as its top export. The other commodities it exports, like metals and minerals, have likewise been facing a price slump.

The disparity between the loonie and the greenback began in 2013, when oil first began its southward journey. Ever since, oil has been stuck in a downward spiral and is presently facing the worst of its price slumps in nearly 11 years.

Now, Canada’s situation may not be any different than the rest of the world, where lower interest rates are persisting, but one thing is certain: the golden era of the Canadian economy may finally be over, with the Canadians now facing more than just a “technical” recession. The spike in hedge fund short interest is in line with this conclusion.

Commodity prices are tanking to decade-lows, the debt-to-income ratio is skyrocketing for Canadians, economic activity is sluggish, and the Canadian dollar is fast losing its value. There’s no other way to put it: the Canadian economy is in the doldrums.

It certainly doesn’t take one to be a hedge fund manager to figure this one out. The CAD to USD exchange rate will see some rough road ahead in 2016.