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USD/CAD: Hitting & Testing (revisited)

Thu, Oct 25 2007, 19:19 GMT
by Mihai Nichisoiu

Mihai Nichisoiu

I could hardly take the US Dollar's rapid surge against the Canadian Dollar seen in this week's first hours as a notable price inflection. Reversals of markets which have been overextending for years, plotting multi-decade lows in the process, almost always take a different price representation.

But the same Monday's upward movement of the USD/CAD did in fact shake a lot of my confidence as a bear. Not only the market has been overextending recently - I did it too, shorting the pair at 1.0048 and 1.0046 on September 26th, at 0.9790 on October 11th, and at 0.9730 on October 19th (this last position happened to be double in size compared with each of the previously opened shorts). In the European transacting time of Monday, October 22nd, however, I decided to dump at once all my short USD/CAD positions, and effectively did so at market at 0.9756 for a profit.

The pair's return to fresh multi-decade lows on Tuesday has not come as a surprise. But as the new week started to unfold my working hypothesis abruptly took a different path, given that any small inch charted against my exposure could have put me in an uncomfortable situation to say the least.

Business as usual, I get out first and ask questions later (if at all). It's so easy for one's selling bias to grow geometrically when the prices fall the way they did last Friday, and an overly highlighted G7 meeting fails to include references to the US Dollar's current weak odds - but it is exactly that which makes the seller all of the sudden vulnerable to a bullish sort of black swan event.

 
The most powerful argument which made me start shorting the USD/CAD a month ago was all about the raw graphical representation of a genuine downtrend. When prices fall like they have done lately, I'm going to be right as a seller each and every day until one day on which I'll decide being right does no longer bring a reward higher than the sum of all risks.

If conditions turn a certain way (and they do seem to do just that), I'll have no hesitation to short again.
Nonetheless, it's already been quite some time since I started to practice as a bear in this market while actually being on the journey to discover a buying opportunity of remarkable reward vs. risk characteristics. But as the frenzy of lower prices has only continued feeding on itself recently, I well know being exposed as a seller and recognizing the early signs of a notable price inflection won't be easy jobs while I'm trying to perform both at the same time.

Published on  Thu, Oct 25 2007, 20:06 GMT