Going into last week’s report on Canadian employment, currency speculators retreated further from what was a record net short position against the Canadian dollar (FXC) less than two months prior.

Net short contracts against the Canadian dollar are less than half the record peak hit in May, 2017.

Source: Oanda’s CFTC’s Commitments of Traders

This retreat is occurring in conjunction with a consistent strengthening in the Canadian dollar. For example, USD/CAD peaked in early May just as net shorts surged. I presume that the original driver of the acceleration in bearish sentiment accompanied negative expectations over the outcome of NAFTA policy talk.

The Canadian dollar has enjoyed a nice 2-month run. Is the attempted post-jobs retracement on USD/CAD an early sign?

Source: FreeStockCharts.com

Since then, the Canadian dollar has enjoyed a series of positive catalysts. Senior Deputy Governor of the Bank of Canada Carolyn A. Wilkins delivered a very bullish speech on the Canadian economy that sent the Canadian dollar rocketing higher as the market started to consider the odds for an imminent rate hike. Governor Stephen Poloz followed up that performance with a reminder that rates cannot stay low forever. The odds of a rate hike sometime in 2017 quickly went from 22% to 72% mostly over the course of these events. The strong jobs report last Friday sent the odds of a rate hike at the NEXT meeting, July 12th, to a whopping 90%. These odds were 5% a month ago.

I am skeptical that the Bank of Canada will hike rates at this next meeting. Just like the U.S. Federal Reserve, the Bank of Canada will want to give markets sufficient time to absorb the implications of a rate hike without going nuts. Also like the Fed, the Bank of Canada will want to see an overwhelming amount of confirmation that both the economy and financial markets are prepared for a rate hike…and this is of course assuming the Bank of Canada really does want to hike soon. Upon hiking, I am further expecting the Bank to disabuse the markets of any notion that an extended tightening cycle is underway. After all, the Bank of Canada still wants to enjoy the presumed benefits of a tightening Fed (weaker Canadian dollar relative to the U.S. dollar). This messaging should also come through if the Bank of Canada chooses not to hike and instead decides to do more prep work for a future hike.