Thursday, December 27, 2012

Revisiting My Wrong Call in 2012


In 2012, my top investment thesis was such:



USD/CAD at major support/ psychological level
I believe that 2012 will bring more volatility in the currency markets due to central bank interventions. More specifically, I suspect we will see those central banks who have not had to act (e.g. the RBA and BoC) have to play "catch up" in their monetary policy in reaction to what the Federal Reserve, the Bank of Japan, and the Swiss National Bank have recently done in efforts to devalue their currency.

Collapsing Current Account
I was right and I was wrong. We are seeing the effects of the yen in the last part of 2012 (we saw a rise in USD/JPY at the beginning of 2012 as well). However, I thought we'd see more action out of the BoC. We did see rate cuts from the RBA but it had little to no effect on the AUD/USD as the Fed was still present in their steps to halt US dollar gains (across the board).

Maybe I was a bit to early? My top conviction call with regards to the currency market in 2013 is positioning for a larger-than-normal move in the USD/CAD exchange rate. 

"Why?"

Historically we are at low levels (parity, as seen on the chart above) which has offered support for the currency pair. 

Second, volatility is none existent in all currency pairs, but particularly in this one.

Third, we are each others largest trading partners. A continued weakened US dollar is not good for their exports to us.


Fourth, out of all of the major developed central banks, they have been the most hawkish over the past few years. This will have to end in a world where all paper currency is being devalued.

Obviously, I have a bearish bias in the Canadian dollar however I am putting on some straddles in FXC at this time (longer dated straddles) and will begin to adjust the trade as needed.  Long volatility position for the moment.




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