Canadian Dollar Strengthens Amidst Stock Market Rally and Inflation Anticipation


Toronto - The Canadian dollar, which had been heavily shorted, saw a surge in strength against the U.S. counterpart on Monday. This development coincided with a robust performance in stock markets and a keen anticipation among investors for forthcoming domestic inflation data, seen as a potential indicator for the Bank of Canada's policy stance.

At present, the loonie is trading 0.3% higher, standing at 1.3615 against the greenback, equivalent to 73.45 U.S. cents. This upward trend follows on from gains observed on Friday, and the currency's trading range for the day spanned from 1.3607 to 1.3669.

Factors contributing to this upswing include "a generally weaker U.S. dollar, outperformance of commodity currencies and the risk-on mood in the market," as articulated by Michael Goshko, a senior market analyst at Convera Canada ULC.

Given Canada's substantial role as a commodities producer, particularly in the realm of oil, the loonie typically demonstrates sensitivity to shifts in market sentiment.

Simultaneously, Wall Street's primary indices experienced a surge, and domestic data indicated positive gains in wholesale trade and manufacturing sales for the month of August.

However, the Bank of Canada's Business Outlook Survey for the third quarter took a more pessimistic turn, with the outlook registering its lowest point since the onset of the pandemic.

Nonetheless, money markets are currently speculating a roughly 40% likelihood of the BoC implementing an increase in its benchmark interest rate during the next policy decision, as a measure to address inflation that persists notably above the bank's 2% target.

The forthcoming consumer price index report for Canada in September, slated for release on Tuesday, is anticipated to indicate a stable annual inflation rate of 4%.

According to Goshko, traders may be paring down their "large short positions" in the Canadian dollar in anticipation of the forthcoming inflation report.

Speculators have noticeably escalated their bearish wagers on the loonie, as evidenced by data from the U.S. Commodity Futures Trading Commission released on Friday. As of October 10, net short positions have risen from 40,151 to 46,489 contracts from the previous week.

In parallel, Canadian bond yields demonstrated an across-the-board rise, mirroring trends observed in U.S. Treasuries. The 10-year yield recorded an increase of 6.9 basis points, settling at 4.042%.