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What's Wrong With This Currency Picture?

Canadian dollar
Pawel Dwulit | Bloomberg | Getty Images
Canadian dollar

The news from Cyprus is roiling the currency markets today, but at least one FX strategist has her eye on another development.

Camilla sutton, chief currency strategist at Scotiabank, has examined the latest report on investor positioning, and has noticed an anomaly that she thinks could benefit the Canadian dollar.

Investors have been increasing their short Canadian dollar positions, which as of the most recent tally stood at $5.2 billion. At the same time, they are increasing their long Australian dollar positions to $2.4 billion.

"Typically, divergence in the net AUD and CAD positions are short lived," Sutton wrote in a note to her clients. Both are so-called commodity currencies, and both tend to respond similarly to shifts in risk appetite and more. "We expect that the market has grown too bearish on CAD and that it is the net short that will be reduced in the coming weeks."

Sutton sees other positives for the loonie as well. The gap between what Canada pays to import oil and what it receives for oil exports is narrowing, she says, providing medium-term support for the currency.

"Improving US fundamentals, relative central bank policy, Canada's strong triple A rating and the improving dynamics in oil prices all support our view that USDCAD should close the year below current levels," she says.

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