Is CAD poised for a short-squeeze?
There's a decent argument that, event-risk given, CAD may be poised for a short-squeeze
Positioning is extreme and against the grain of recent $ moves
Data has been surprising to the upside supporting a shift in momentum
Lead indicator trends support a recent move back toward recovery and outperformance
Technicals general play to a constructive weekly chart picture
While CAD is of course very ‘event dependent’, there’s a good argument to suggest it could be primed for outperformance on a short-squeeze in the near-term. There’s a few supportive strands to the short-term argument -
Positioning: While recent spec positioning showed some moderation in recorded overall $ longs, CAD was the exception, remaining at the extreme shorts., In z-score terms, short CAD positioning is right at the limits, some 3stdev from mean. Typically, sharp bursts of stretched spec unwinding can knock several big figures off the pair.
Recent real economy news: For Canada, this has swung from negative to more recently positive. Last week’s labour market data showed a third straight employment gain, likely increasing BoC confidence in the recent GDP pick up being sustainable
Lead indicators: This directional shift is well reflected in leading indicators. The OECD amplitude adjusted lead indicator is at its highest since the post covid spell, and, for example, outperforming the European Big 4 by a good margin, suggesting the economy has good relative momentum.
Trade: Risk is clearly material and somewhat binary, but the market is arguably currently fully positioned/hedged bearishly in recent months. As such, while unpredictable, given recent Canada efforts to offer concessions, hold intense talks, while also vocalise threats of a strong global trade diversification strategy, there may be scope for positive surprise in terms of progress into the Aug 19 latest deadline. It’s also not obvious that escalation is in the US interest into the elections.
Technicals: Charts broadly reinforce the constructive CAD view. USD/CAD daily momentum is turning lower, while the weekly chart remains under pressure, leaving scope for further declines. A break below support at 1.3900 would strengthen the bearish signal and open the way toward the late-June lows around 1.3800–1.3820.
For alternative, or split expression that reduces direct dollar exposure, EUR/CAD also looks negative on the weekly chart. A close below 1.6000 would reinforce the downside signal.
Finally, CAD/NOK offers a more neutral oil-cross expression. The monthly chart has recently based above important long-term support. A break above higher resistance and the trendline around 7 if seen would play to a monthly upside breakout, consistent with a sentiment shift.