Loonie seen further clipped as speculators sell Canada

[May 11, 2017]  By Fergal Smith

TORONTO (Reuters) - The Canadian dollar could have further to fall over the coming weeks now that speculators have turned bearish on the country and as the currency nears the C$1.40 level targeted by some investors.

The loonie  has performed worst among G10 currencies this year. Late last week it touched its weakest in 14 months, near C$1.38 to the greenback, or 72.50 U.S. cents, pressured by a five-month low for the U.S. crude oil price.

Monetary policy divergence between the U.S. Federal Reserve and the Bank of Canada has added pressure on the Canadian dollar. Speculators have increased net short positions in the currency to the most since February 2016.

"We are seeing over the last week or two a large short Canada trade come into effect," said Scott Smith, chief market strategist at Viewpoint Investment Partners.

Depressed oil prices have prompted decisions by international energy companies to dump about $22.5 billion of Canadian oil sands assets this year, while a proposed U.S. border adjustment tax could threaten Canada's exporters.

Recent headwinds for Canada have also included U.S. duties on Canadian softwood lumber, a more uncertain outlook for the North American Free Trade Agreement and investor wariness about how the troubles of alternative lender Home Capital Group Inc <HCG.TO> could affect the country's real estate market.

In a trade that has been called "The Great White Short," investors are selling Canadian assets on expectations that the country's economy will suffer if a housing bubble pops.

"Technically, the Canadian dollar is in a tough spot," said Adam Button, a currency analyst at ForexLive. "I don't even think you need oil to fall further to see dollar-CAD hit C$1.40 in the month ahead."

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

A Reuters survey earlier this month showed strategists expect the loonie will recover over the coming months to trade around C$1.35. But currencies often overshoot, while round numbers, such as C$1.40, tend to act as pivots, where price swings can occur.

On Wednesday, the loonie was around C$1.365.

Economists say Canada's gross domestic product may have grown as much as 4 percent at an annualized rate in the first quarter. But solid data is not going to "translate" into support for the currency until the Bank of Canada turns more hawkish, Button said.

The central bank has played down the sustainability of recent better growth, while Canada's 2-year yield has fallen more than 60 basis points below its U.S. equivalent, to its largest gap in 10 years.

Still, cheapening of the market's pricing of Canadian dollar volatility has offered a lifeline for investors who must hedge currency exposure.

"As we move toward C$1.40, "vols" will move higher," said Patric Booth, head of trading at Velocity Trade. He recommends the purchase of a Canadian dollar put option, which gains in value as the loonie weakens.

(Reporting by Fergal Smith; Editing by Dan Burns and David Gregorio)

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