The loonie has had a tough year.
It has dropped down the charts in 2022 after being the best performing against the U.S. dollar in 2021.
The Canadian dollar was trading at 77.02 US cents today, a low not seen since November 2020. The speculators have slashed their bullish bets for the currency. Net long positions had fallen to 9,029 contracts from 20,881 the week before, according to Reuters.
A lot of it has to do with a very strong U.S. dollar, and in a fascinating note from Bank of America strategists, who explain why Fridays and Thursdays are the worst days of the week for Canada's currency.
The U.S. dollar has been having a great year, unlike the loonie, which tends to be seen as a safe haven in uncertain times. BofA strategists Howard Du and Vadim Iaralov believe that energy and commodities are the only major asset classes in the U.S. to outperform it.
The greenback has rallied about 8% against other G 10 currencies, and Du and Iaralov found that most of the gains were made on Thursdays and Fridays, with cumulative returns of 1.9% and 2.2%, respectively.
These days were the days that the US stock markets saw their biggest selloffs, racking up cumulative losses of - 10.6% on Thursdays and - 7.9% on Fridays.
The strategists said that investors are more reluctant to hold risky assets over the weekend due to 1 the ongoing war in Europe, 2 the withdrawal of central bank liquidity and increase price gap risks, which supports demand for the USD.
Wednesdays tend to be more weak for the dollar, especially Fed Wednesdays. The strategists think that this is because investors buy the USD ahead of what are expected to be hawkish FOMC meetings, sell the fact on the day and buy in again as uncertainty remains high.
After the selloff on the previous Thursday and Friday, stock markets tend to have their best days on Monday afternoons.
The Canadian and Australian dollar is the closest relationship to the U.S. equity markets across major G 10 and emerging market currencies in 2022, according to strategists.
They said these two currencies had the biggest loss against the USD on Thursdays and Fridays, which coincided with the bearish day-of-week seasonality for the U.S. equity market.
The cumulative losses for the Canadian dollar were - 1.2% and - 2.5% on Thursday and Fridays, and BofA says there is a chance of more losses in equity routs to come.
In a note Friday, Scotiabank chief FX strategist Shaun Osborne said that the Canadian dollar has one of the strongest positive correlations with U.S. equity, which means six consecutive weekly declines have hampered the performance of the CAD. While Osborne and his team expect more downside risks for the Canadian dollar, they think that relatively high commodity prices and a resilient domestic economy should limit losses for the moment.