Loonie rally that defies Bank of Canada rate cuts to persist

financialpost.com:

When the Bank of Canada eases monetary policy and the economy slows, money managers usually brace for a weaker loonie.

Yet, the Canadian dollar is fresh off its best monthly gain so far in 2024. And options traders expect it to rally even more despite the country’s gloomy economic outlook — the unemployment rate is at its highest in two years and consumers are strained, racking up credit card balances. Those conditions have the Bank of Canada poised on Wednesday to cut interest rates for a third-straight time this year as it moves to lower borrowing costs.

Last week, options traders were the most bullish on the loonie in 15 years, placing wagers that the currency will advance further versus the dollar over the coming month. Much of the optimism stems from the greenback’s lacklustre performance.

“The dollar’s broad-based decline is doing the bulk of the work in driving the loonie higher, but a number of idiosyncratic factors are also providing lift,” said Karl Schamotta, chief market strategist at Corpay in Toronto.

A recent near-record wager against the loonie is prompting some investors to position for an even bigger rally if traders decide to cash out. Hedge funds and asset managers still hold a roughly US$8 billion short bet against the Canadian dollar in the latest Commodity Futures Trading Commission data for the week through Aug. 27, down from a peak of US$14 billion earlier in August.

“Bearish speculators are capitulating, suggesting that early-August’s historically extreme short position on the Canadian dollar could be largely unwound,” said Schamotta.

The Canadian dollar climbed 2.3 per cent last month versus the greenback, compared with an average negative return of 0.2 per cent for August over the past 25