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Jens Nordvig and Charles St-Arnaud from Nomura Global Markets Research believe the Canadian dollar has significantly further to fall against the U.S. dollar and have doubled their USD/CAD position in their model portfolio.

The overriding thesis for the long U.S. dollar and short loonie advice is that the domestic currency has not yet adjusted for the effects of sharply lower West Texas Intermediate crude oil prices. In a recent research report, the two economists write,

"WTI has dropped to around $53 (U.S.) per barrel, down another 10 per cent since our recommendation in December [to buy USD/CAD]. This will have a strong negative impact on Canada's terms of trade and nominal export balance."

The chart below compares the Canadian dollar to the Citi Terms of Trade index, a weighted index measuring the change in price of the goods Canada exports. The loonie's 16 per cent decline since the beginning of 2013 has not kept pace with the rapid, oil-driven slide in the terms of trade index. The Terms of Trade index's decline means less foreign currency is coming into Canada as the price of oil and other goods falls.

SOURCE: Scott Barlow/Bloomberg

Mr. Nordvig and Mr. St-Arnaud also believe that the economic effects of lower oil prices are not yet reflected in the Canadian yield curve. They raise the possibility that the Bank of Canada will lower its domestic growth forecast at the next meeting. Even if this doesn't happen, Nomura expects lower government of Canada bond yields to reflect the realization that growth will be slower, making domestic bonds less attractive to foreign investors. Lower demand for Canadian bonds translates into less foreign demand for the Canadian dollars needed to buy them.

The economists believe the loonie would be fairly valued at $0.83 (U.S.) and, unless oil prices rally significantly, they will remain bearish on the Canadian dollar until it hits that level.

The argument appears compelling to me, but currencies are notoriously difficult to predict over short time frames. That caveat aside, risk-tolerant investors can play along with Nomura's idea using a currency ETF such as the Horizons U.S. Dollar Currency ETF.

Follow Scott Barlow on Twitter @SBarlow_ROB.