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The Canadian dollar is a potential tactical buy, says one FX strategist, noting the balance of positioning, oil dynamics and the technical setup favours gains.
Brent Donnelly at Spectra Markets says the current setup points to downside in USD/CAD, particularly if the macro backdrop of firm oil prices and resilient equities holds.
"I do think short USDCAD here makes sense in many scenarios," he says in a note out Thursday.
The call rests heavily on a significant 'long' positioning in the dollar that leaves it vulnerable.
Donnelly notes that markets are heavily long dollars since the war in the Middle East, despite broadly bearish views on the currency, creating the conditions for a disorderly unwind. "The market is extremely long USD and yet people are mostly bearish USD. This mismatch… could resolve in a massive forced removal of hedges."
That dynamic becomes particularly potent in an environment where oil prices remain elevated.
"Oil up + stocks up tends to be bearish USD," says Donnelly.
Why would the CAD be a prime candidate to take the other side of the trade? "The 'Canadian economy is really bad' narrative seems to be well priced in by now," explains Donnelly.
That leaves room for a reversal if external conditions turn supportive.
On tactics, Donnelly suggests selling USD/CAD with a clear risk framework.
"Short with a stop above 1.40 or buying 2-week 1.3800s both look reasonable."
If oil remains supported and equities hold up, the case for Canadian dollar strength strengthens materially.
In that environment, he says, "short USDCAD will be a nice trade."