The Hamilton Spectator

Investors betting on loonie’s strength

Rising commodity prices have observers predicting calm despite setbacks

ROBERT FULLEM

The Canadian dollar, one of the best-performing major currencies this year, may be poised to get a sustained second wind.

That’s in large part because many of the fundamentals — elevated prices for raw materials and accommodative central bank policies — that have buttressed the reflation trade this year remain intact.

Many of these same dynamics are also undermining the yen, a key counterpart for the trade.

The loonie suffered setbacks over the past month as asset managers scaled back long reflation bets amid concern over surging virus cases from the Delta variant.

But speculators remained sanguine on the outlook, with leveraged funds increasing their holdings in the second week of July, data from the U.S. Commodity Futures Trading Commission show.

In the options market, while investors have hedged shortterm event risks, the inverted shape of the currency’s volatility curve suggests they remain confident in the outlook that calm will prevail.

“Generally when the market doubts the global recovery, my inclination is to go the other way,” said Alan Ruskin, chief international strategist at Deutsche Bank.

“The recovery is plainly being hurt by the Delta variant especially in countries with low vaccination rates, but even allowing for this asynchronous recovery, the global economy in aggregate will remain robust.”

Ruskin is recommending a basket of the loonie, New Zealand dollar and Norwegian krone going long against the yen, “that is essentially consistent with the reflation trade.”

Commodity prices, after withstanding sharp setbacks over the past month, climbed to a six-year high last week.

The Canadian dollar’s sharp downturn in the past month, along with other resourcelinked currencies, suggests upside potential in a return to the long-term trend.

BUSINESS

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2021-07-27T07:00:00.0000000Z

2021-07-27T07:00:00.0000000Z

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