Investors are betting against the Canadian dollar in record numbers, as the number of people holding short positions against the loonie has hit an all-time high.
Data from the Commodity Futures Trading Commission — the American regulator in charge of governing international currency exchanges — said in a data release Friday that the total value of short positions against the Canadian dollar have increased in recent days by $400 million to $7.4 billion, the highest amount on record.
A short position is the term used to describe when an investor borrows any given investment and sells it, expecting to be able to replace it later at a lower price. The investor profits by pocketing the difference in the two prices.
When large numbers of investors bet against or "short" an investment it's viewed as a sign of lack of confidence in its value. Some economists argue that shorting an asset isn't just betting against it, but is often enough to manipulate it lower in the process.
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Loonie at 97 cents
People who short a currency aren't investing in it to use the underlying currency, they're simply placing a bet on which way they think the currency is headed. And the record number of them betting against the loonie is telling.
After peaking above $1.05 US in 2011 and spending most of 2012 above par, the loonie has lost some of its upward momentum of late.
The Canadian dollar was trading hands at 97.45 US cents on Monday, up about a fifth of a cent.
The slowly rebounding U.S. economy has strengthened the greenback in recent months, as has the general tendency to flee toward the U.S. dollar during times of uncertainty.
"There is no question that today the Canadian dollar is overvalued, and it is creating a competitive challenge for our exporters," Toronto-Dominion bank's chief economist Craig Alexander said in an interview. "I do actually think that there is a real possibility that the Canadian dollar could weaken over the next couple of years."
A weaker Canadian dollar would reduce the purchasing power for Canadians going abroad, but it can often be a boon for exporters, who look much more competitive internationally when their prices end up being reduced in foreign terms.
Alexander said the dollar could have a ways to go yet. "For a whole variety of different reasons, I actually think there's significant downside to the Canadian dollar over the next couple of years," Alexander said.
"I think that the Canadian dollar could get down to 90 cents, 92 cents."