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

“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.

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