Canada Slide Continues

The Canadian dollar's losing streak has extended into its fourth session, the longest such streak since early Q1. The main driving force seems to be position adjusting. The Canadian dollar was the strongest of the major currencies last month, gaining almost 6.7% against the US dollar. This of course reflected buying of Canadian dollars and the net speculative position at the IMM grew from long 9.2k in late June to 36k contacts as of Aug 4, the largest net long position June 2008.

Indeed, a look at the best and worst performer last month and thus far this month, supports ideas of position adjusting. The Mexican peso, for example, was the worst performer of what Bloomberg considers major currencies and thus far in Aug it is the best performer. The top three best performing major currencies in July, Canada, Sweden and Norway are now among the three worst performers. The South African rand is a exception. It was weak in July and is the worst performer thus far in Aug.

We recommended long Canadian dollar positions in July, but turned cautious early last week just before Finance Minister Flaherty repeated concern about the Loonie's strength.

The US dollar is trying to push through the CAD1.10 level for the first time since July 23 and is extending gains through the 20-day moving average (~CAD1.09). Near-term risk extends toward CAD1.1050.

Many observers and investors inclined to "reflation trades" still like the Canadian dollar and it would not be surprising to see CAD buyers re-emerge soon, though if the CAD1.1050 is paid, there is potential for another 1% or so.