Currency markets face the prospect of a Canadian dollar short squeeze in the aftermath of Wednesday’s Bank of Canada meeting.

Hedge funds and other large speculators amassed the largest bearish stance in the currency since June 2017, Commodity Futures Trading Commission data covering the week ended July 3 show. The swollen position could become an issue heading into the BoC’s policy meeting Wednesday, with 96 per cent odds that the bank will raise rates for a second time this year, according to overnight index swap pricing.

The divergence between positioning and rate-hike expectations suggests that Wednesday’s policy decision could spur a round of short covering, according to Canadian Imperial Bank of Commerce. Though markets are looking for the BoC to deliver a “dovish hike,” FX and macro strategist Bipan Rai expects that even a neutral statement from the bank will be taken as hawkish and spur loonie strength.

“We’ve seen this movie before. The market tends to be underweight the Canadian dollar into the Bank of Canada, then scrambles to cover shorts after it,” Rai said. “That could be what carries the momentum below the 1.31 handle and potentially toward 1.30.”

The Canadian dollar has fallen more than 4 per cent against the greenback in 2018, making it the third-worst performing Group-of-10 currency in the span. Increasingly tense U.S.-Canada trade relations and concerns over domestic household debt have weighed on the loonie, which traded at $1.3119 per U.S. dollar as of 11:51 a.m. in New York.