A Day in Review

  • Good to see Bank of Canada hold
  • OIL will bounce in weeks ahead
  • Strange price action lets me build
  • Focused on USDCAD 1.4430

VALIDATION - Looking back at Wednesday's Bank of Canada decision, it definitely feels good to have gotten that call right. Heading into the risk, more than 50% of the market was pricing a cut, and yet, from my end, I saw no compelling reason for the BoC to move. While it's true, the decline in OIL prices has been a drag, OIL is not the only driver of the Canadian economy, and as I already highlighted, at current oversold levels, should be poised for greater upside than downside over the coming weeks. As such, any recovery in OIL will mitigate the need for a rate cut. Central banks aren't built, nor should they be, to react to short-term moves in markets. While it's true OIL has been moving lower for some time, the Bank of Canada has already factored this into its policy. The only thing the Bank of Canada may not have factored, is this drop in early 2016.

STABILITY - But 'early' is the key word. We could just as easily get a recovery of $5-10 before the next BoC decision. So it was in the central bank's best interest to leave policy on hold. Of course, another major consideration for the hold was the rapid decline in the Canadian Dollar. Had the BoC gone ahead with a cut, it would have encouraged a further decline in the Canadian Dollar, in what has already been the most notable decline on record. Stability is also important to central bankers and cutting rates now would have created too much of a depreciation. The correct move was to stay on hold and wait until the March decision. And that's what was done. I wouldn't be spending so much time on this point had I not felt as strong heading into the decision.

WELCOME SURPRISE - Fortunately, in the strangest of ways, I was able to capitalize on the move. While I needed to be responsible for my portfolio and couldn't just jump in and add exposure to my existing CAD long ahead of the risk, I was able to take advantage of a disconnected move in the aftermath of the BoC decision. Immediately following the rate decision, USDCAD collapsed over 100 points, as was to be expected. And so, it didn't look like I would get my chance to build a separate position. But just after the decision, something else was going on - a major selloff in stocks and more downside pressure in OIL. Both of these developments opened a quick jump in USDCAD back above 1.4600, to as high as the 1.4650s.

Never force a position. Always let the market come to you. Via @joelkruger

KEY LEVEL - I had a strong feeling all of these moves would finally find good support, and this in conjunction with the confirmed knowledge of a rate hold and violently overbought USDCAD market, had me very excited and feeling lucky to jump in and add to my USDCAD short in the 1.4630s. From that point, it was smooth sailing with USDCAD trading lower for the remainder of the day and into Thursday. I'm not sure what happens now, though it will be important for USDCAD to take out 1.4430 to really get this trade going. If it can't break 1.4430 and trades back up towards 1.4650, I will have to stand aside on this most recent short and will wait some more. But for now, I am short 1.4517 and we'll see how it plays out. Otherwise, I have my eye on GBPUSD, and will be looking to buy this very stretched market.

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