FX Traders Fall Out of Love With Loonie as Canada Goes to Polls By

(Bloomberg) — Foreign-exchange traders are feeling a bit on edge about Canada.

While voters prepare to render their verdict on Prime Minister Justin Trudeau’s government at the polls on Monday, the market is taking a distinctly downbeat view of the local currency, despite recent buoyancy in resource prices. Indeed the rise in global commodity costs could even become a headwind for the country’s economy rather than a tailwind as concerns about domestic inflation take center stage for citizens, politicians and central bankers alike.

The , as it is affectionately dubbed because of the bird that graces Canada’s coinage, has been one of the worst-performing developed-market currencies in the second half of this year. After outstripping all its Group-of-10 counterparts in the first six months of 2021, it’s fallen 2.9% since June 30 through last week’s close. And activity within derivative markets suggests there could be more pain to come for the currency even as the Bank of Canada starts to pave the way for monetary policy tightening.

“It’s been pretty clear over the last week or two that the CAD is just not responding to some of the positive fundamental impulses in the way we would have expected,” said Shaun Osborne, chief currency strategist at Scotiabank. “I suspect the CAD may continue to struggle a little bit.”

In the options market, the right to sell the Canadian dollar versus the greenback in three months’ time has been rising in cost relative to the price of purchase rights. So-called risk reversals, which compare the costs of these puts and calls, this month reached levels unseen since June 2020, suggesting increased interest in hedging against Canadian dollar losses.

Data from CME Group (NASDAQ:) shows that traders have built a notional portfolio of more than $50 billion in low-delta Canadian dollar put options at strikes of C$1.33 per greenback, a further sign of concern about loonie weakening from current levels near C$1.28. One- and three-month implied volatility measures, meanwhile, have ticked up in recent weeks, suggesting that some investors are bracing for an increase in activity.

Positioning data from the Commodity Futures Trading Commission also shows a dialing back of Canadian dollar bullishness. While speculators maintain a net long position, it has fallen notably from its recent peak in mid July, while asset managers are also holding smaller bullish positions than they were a couple of months ago.

All this comes even as the Bloomberg Commodity Index has risen 3.2% since June 30 through last week, although is around 2% lower.

Opinion polls in Canada have indicated that Trudeau’s Liberals are in a tough fight to remain in power, despite promises to boost spending. While elections have not typically been a source of major investor disquiet when it comes to Canada, there are a number of elements to this year’s battle…