Nobody wants to own the Canadian Dollar before Wednesday

Hedge funds hold one of their biggest bets against the Canadian Dollar since 2006, with traders putting a Bank of Canada hike at about 80%. They're betting on one hike into a shrinking job market, and the central bank's forecasts will show whether they're right.

Hedge funds have more than doubled their bet against the Loonie since mid-September, and kept adding to it in the week the odds of a Bank of Canada (BoC) rate hike went from about 30% to about 80%. Pension and mutual funds have bought back almost all of an even bigger bet against it since August, and none of them has switched to owning it. Only the banks that make the market hold a big bet on a higher Loonie, and they hold it because everyone else sold to them.

The BoC has held its rate at 2.25% for seven straight decisions since October 2025, and a hike to 2.50% on Wednesday would be its first since July 2023. It comes with the Monetary Policy Report (MPR), the BoC's quarterly forecasts, which is where the hedge funds' bet gets tested. A hike in response to rising gasoline prices in an economy that has lost jobs two months running may not get a second one, and the Loonie's gains from this one are only as good as the odds of the next.

The bet against the Loonie is nearly as big as when the BoC was cutting

Every week the Commodity Futures Trading Commission (CFTC) counts who holds Canadian Dollar futures, contracts that pay out on where the Loonie trades on a set date. The group it calls leveraged funds, mostly hedge funds, held 91K more contracts betting on a lower Loonie than on a higher one as of October 20, worth about CAD $9.1 billion. That's up from 39K on September 15, and the bet grew in each of the five weekly reports since. A bet against a currency is ended by buying it back, so that's also 91K contracts of Loonie buying that hasn't happened yet.

In 20 years of weekly reports since 2006, only ten have shown a bigger one. Three came in July and August 2024 and two in January 2025, while the BoC was cutting rates, and five came in July and August 2026, as the US tariff deadline approached. That makes this the first bet of this size held into a BoC hike rather than a cut.

Asset managers, pension, mutual, and insurance funds held 105K contracts against the Loonie on August 11, more than hedge funds. By October 20, they were down to 5.4K. The CFTC's other reportable traders, the one group outside the banks betting on a higher Loonie, hold 7.9K contracts, under a tenth of the hedge funds' bet. The banks hold 101K.

The hedge funds built most of their bet while USD/CAD climbed from its September low to 1.4300, which it reached twice in mid-October and couldn't break. They've held it while the pair gave back about half the climb, in a slide that began before BoC Governor Tiff Macklem spoke. The daily Stochastic Relative Strength Index (Stoch RSI), a momentum gauge, had already turned down from the top of its range and is now near the bottom, so the Loonie's run is stretched going into the decision. USD/CAD broke under its 50-day average on October 20 and dipped below 1.4000 on October 23 without staying there, and a daily close under that line would say the buying has more behind it than funds ending old bets.

Strip out gasoline and Canada's inflation is 2.2%

Canada's Consumer Price Index (CPI) rose 3.1% in the year to September, below the 3.2% forecast, and gasoline cost 27.8% more than a year earlier. Without gasoline, prices rose 2.2%. CPI-trim and CPI-median, the two gauges the BoC uses to strip out each month's biggest price swings, fell to 1.8% and 1.9%, both below the BoC's 2% target and lower than in August.

The odds of a hike were about 30% on October 16 and about 80% by October 20, and that release came out in between. Governor Macklem said in Bangkok on October 17 that the BoC will likely raise its inflation forecast well above July's. The odds of a first hike in three years rose 50 points in the week the BoC's own core measures fell.

Oil reaches the Loonie two ways: Canada exports crude, so a higher price brings in more US Dollars, and Canadians buy gasoline, so the same price hits the CPI the BoC sets rates on. The July MPR had inflation easing to about 2.5% in the second half of 2026 and reaching 2% by early 2027, on Brent at US $75 a barrel. Brent is above US $100.

The BoC would be raising rates into 110K lost jobs

Canada lost 42K jobs in August, and 68K in September, and unemployment rose to 6.5%, according to the Labour Force Survey (LFS). US-Canada trade talks collapsed on August 21, minutes before a tariff deadline. A central bank raising rates while employers cut jobs has less room to keep going, which is the hedge funds' case against the Loonie. In 2010, the BoC raised rates three times between June and September, and the next hike came in July 2017.

The hike reaches USD/CAD through the gap between US and Canadian interest rates. US two-year bonds paid about 1.36 percentage points more than Canada's last week, down from about 1.62 on October 9, and a smaller gap means less extra interest for holding US Dollars instead of Canadian ones. Most of Wednesday's hike is already inside that 1.36, because two-year yields move on what traders expect the BoC to do rather than on what it has done.

The Federal Reserve (Fed) announces its decision the same Wednesday and is expected to hold, so the MPR's view of the next BoC hike is what's left to move the gap. Most economists in a Reuters poll expect a hike on Wednesday and another by the end of March, and the hedge funds are betting against the second.

The bet loses if the MPR keeps inflation above target into 2027

With the decision mostly priced, the fork is the MPR's inflation forecast and what the statement says about the December 9 meeting. If the new forecast keeps inflation above 2.5% well into 2027 and the statement leaves December open, traders add the second hike and the rate gap narrows past what's priced. That's the branch where the Loonie gains the most, because the hedge funds' 91K contracts have to be bought back on top of the rate move. A daily close below 1.3950, where the 200-day average sits, would confirm it.

If the forecast has inflation back near 2% in 2027 once gasoline stops climbing, and growth is marked down for the tariffs and job losses, the hike reads as a one-off. The gap stops narrowing, the Loonie's gains depend on Oil staying above US $100, and the hedge funds' bet pays, with USD/CAD back above 1.4100 as the sign. A hold, at about 20% odds, pays them fastest, because the 80% comes out of the price at once.

Friday's CFTC report stops at Tuesday, so the first count taken after the decision comes out on November 6 with the October LFS, and the jobs number the hedge funds are betting on and the record of whether they held on arrive together. The asset managers, at 5.4K contracts, are the group closest to owning the Loonie outright.