Ahead of Wednesday's Bank of Canada decision, speculative positioning has swung sharply against the Canadian dollar (CAD or loonie), said Bank of Montreal (BMO).
CFTC data show the non-commercial net short position jumping to 94,111 contracts as of June 2 from 68,882 a week earlier -- that's more than double the average short position over the past six years, or 40,388, noted the bank.
That shift has coincided with USD/CAD pushing above $1.395, the weakest level for the currency since December, pointed out BMO.
Still, positioning remains less extreme than in the immediate aftermath of President Donald Trump's reelection and early trade war tensions.
The move likely reflects weak domestic momentum, with two consecutive quarters of gross domestic product contractions, reinforcing expectations that the BoC will struggle to deliver on the roughly 30bps of tightening priced in for year-end, stated BMO.
Consistent with that view, the two-year Canada-U.S. yield spreads have widened beyond -120 bps, the most negative since November, added the bank.
That said, the data flow has turned less one-sided. A firmer May jobs report and an April GDP rebound in the flash estimate suggest the economy retains some resilience, potentially giving policymakers scope to maintain a hawkish tone from the prior meeting, according to BMO.
With positioning now heavily skewed, the bar for a CAD rebound is lower. Any improvement in geopolitical or trade conditions could trigger a short-covering move -- but both remain highly uncertain catalysts for now.