Loonie ... the infamous USD/CAD
- Thread starter usdoutlaw
- Start date
Not irrational, Ivanovich - unexplained. I have a model that takes into account resource prices (heavily weighted for oil) and interest-rate gap. It worked beautifully in 2006, not so beautifully in the last few months. Conclusion: my model is incomplete.
My theory on economic data was this: expansion in an exporting economy means (or is fueled by) greater inward capital flows and a rising currency; expansion in a importing economy means greated outward capital flows and a falling currency. I correctly predicted USDCAD last year because I understood that 13 straight interest rate increses by Greenspan were meant to slow the US economy down: that would reduce their trade deficit and push the dollar up (against the loonie: at the same time it should have pushed equities down and discouraged financial inflows, leading EUR and GBP to rise against USD. There's a difference in behaviour again between trade-based and investment-based international money relationships.)
Well, the US economy has cooled off, deficits have dropped, resource prices have fallen, and USDCAD did go up, reaching 1.17, as my model predicted. After that, I had no clue what it was going to do, because US equities weren't doing at all
what I thought they would, and the Canadian economy wasn't
being noticeably slowed down by the drop in trade. So I took February off trading altogether, while I reassessed, and then in March, instead of trying to predict what individual currences were going to do, I took the broad portfolio approach, making small bets in many pairs, setting modest targets, and I did quite well at it: 31% in March, 13% in April. Then in May I let things get unbalanced, put way too much long on USDCAD, hedged against USD weakness but failed to hedge against CAD strength.
Live and learn.
Thankfully missed most of the big slide, which happened during
my "balanced portfolio" period. I made a few futile attempts to catch turnarounds and lost some money in the process, but mainly in that period I was on EURUSD and USDJPY, and doing quite well, thank you.
OK, so new model: currency values work on a feedback loop. A weak loonie is good for the Canadian economy - promotes manufacturing exports, offsets the drop in resource prices - but a strong Canadian economy is bad for the loonie. So I think we're at least temporarily caught in a cycle, maybe 6 months long because it takes a few months for things to work their way through the system, of strong data -> high loonie -> (eventually) weak data -> low loonie -> (eventually) strong data, and so on.
Underneath it all, the loonie is still a resource-based currency, resources are way overbought and are bound to correct, the US economy slows while the equities markets roar; the housing market slumps; conservative investors switch out of mortgages into high-risk investments like resources and unsecured credit: it's a classic hard-landing scenario, like 1929, 1987 and 1989.
My birthday (October 24) is a classic day for a crash: I think I'll make myself a present of some Put options, just in case.
In the medium term (6 months-2 years), I still see a US recession cutting resource prices and trade deficits and pushing USDCAD up, maybe not to 2001-2002 levels, but over 1.20, anyway. In the short term, it will loll about below 1.10 while it waits for the economic data to reflect the fact.
My GBPCAD short has made me $2300 in the past 8 hours - hey, it pays the rent. The British political interregnum theory also looks good looking at EURGBP, which zoomed after May 10.
My theory on economic data was this: expansion in an exporting economy means (or is fueled by) greater inward capital flows and a rising currency; expansion in a importing economy means greated outward capital flows and a falling currency. I correctly predicted USDCAD last year because I understood that 13 straight interest rate increses by Greenspan were meant to slow the US economy down: that would reduce their trade deficit and push the dollar up (against the loonie: at the same time it should have pushed equities down and discouraged financial inflows, leading EUR and GBP to rise against USD. There's a difference in behaviour again between trade-based and investment-based international money relationships.)
Well, the US economy has cooled off, deficits have dropped, resource prices have fallen, and USDCAD did go up, reaching 1.17, as my model predicted. After that, I had no clue what it was going to do, because US equities weren't doing at all
what I thought they would, and the Canadian economy wasn't
being noticeably slowed down by the drop in trade. So I took February off trading altogether, while I reassessed, and then in March, instead of trying to predict what individual currences were going to do, I took the broad portfolio approach, making small bets in many pairs, setting modest targets, and I did quite well at it: 31% in March, 13% in April. Then in May I let things get unbalanced, put way too much long on USDCAD, hedged against USD weakness but failed to hedge against CAD strength.
Live and learn.
Thankfully missed most of the big slide, which happened during
my "balanced portfolio" period. I made a few futile attempts to catch turnarounds and lost some money in the process, but mainly in that period I was on EURUSD and USDJPY, and doing quite well, thank you.
OK, so new model: currency values work on a feedback loop. A weak loonie is good for the Canadian economy - promotes manufacturing exports, offsets the drop in resource prices - but a strong Canadian economy is bad for the loonie. So I think we're at least temporarily caught in a cycle, maybe 6 months long because it takes a few months for things to work their way through the system, of strong data -> high loonie -> (eventually) weak data -> low loonie -> (eventually) strong data, and so on.
Underneath it all, the loonie is still a resource-based currency, resources are way overbought and are bound to correct, the US economy slows while the equities markets roar; the housing market slumps; conservative investors switch out of mortgages into high-risk investments like resources and unsecured credit: it's a classic hard-landing scenario, like 1929, 1987 and 1989.
My birthday (October 24) is a classic day for a crash: I think I'll make myself a present of some Put options, just in case.
In the medium term (6 months-2 years), I still see a US recession cutting resource prices and trade deficits and pushing USDCAD up, maybe not to 2001-2002 levels, but over 1.20, anyway. In the short term, it will loll about below 1.10 while it waits for the economic data to reflect the fact.
My GBPCAD short has made me $2300 in the past 8 hours - hey, it pays the rent. The British political interregnum theory also looks good looking at EURGBP, which zoomed after May 10.
Quote from Lawrence Chan:
I have seen news feed refer to USD/CAD as the Loonie Express (or Toonie Express)
Based on historical data, we are testing the 70s price level when gold was very expensive, oil prices going to the roof, etc.
Unless some market shock happens, it is hard for anyone to jump onto the opposite side against this "express train".
Using 1970 rates to support a position seems flawed to me since Canada just started to float it's currency after having it at a fixed rated between 1962 and 1970.
Read: http://www.bankofcanada.ca/en/speeches/2000/sp00-7.html to find out more.
Ah... that was JM Keynes, who was a great macroeconomist but lost his shirt on the market. Keynes was responsible for one of the most amazingly accurate predictions ever made. He said that if Germany were forced to pay reparations in 1919, the result would be "a financial crisis in five years, a depression in 10, a dictatorship in 15 and a new war in 20". Of course he was right on the money on all counts.
Only.
Economic historians now agree that the reason for the 1923 hyperinflation was not reparations but the massive war debt, which Weimar governments cynically cleared by printing money.
The Wall Street crash of 1929 and subsequent worldwide depression had nothing to do with German reparation payments.
That Hitler became dictator also had nothing to do with reparations, which had already been cancelled under von Papen. Also, it was almost an accident. The Nazis lost votes in the second 1932 election, and looked to be on their way down. Hindenburg was most reluctant to let them into government, and had the option of imposing presidential rule instead. If he had, the economy would have recovered, radicalism would have subsided, and Hitler would have been a footnote in history.
There was also nothing inevitable about WWII: the German people didn't support it (no wild demonstrations in the streets as in 1914), the generals were against it, and if instead of Hitler you had someone more like Mussolini in power, he wouldn't have venture beyond bullying small countries.
In other words, Keynes's prediction was nothing but a series of coincidences,
He thought he understood. He didn't He lost money on the market because he thought he understood, and didn't. He thought his predictions were rational, and they weren't. He believed that if the market disagreed with him it was irrational. It wasn't. He was just a typical smart-ass academic know-it-all who didn't know it all, and blamed the universe for his own ignorance.
Only.
Economic historians now agree that the reason for the 1923 hyperinflation was not reparations but the massive war debt, which Weimar governments cynically cleared by printing money.
The Wall Street crash of 1929 and subsequent worldwide depression had nothing to do with German reparation payments.
That Hitler became dictator also had nothing to do with reparations, which had already been cancelled under von Papen. Also, it was almost an accident. The Nazis lost votes in the second 1932 election, and looked to be on their way down. Hindenburg was most reluctant to let them into government, and had the option of imposing presidential rule instead. If he had, the economy would have recovered, radicalism would have subsided, and Hitler would have been a footnote in history.
There was also nothing inevitable about WWII: the German people didn't support it (no wild demonstrations in the streets as in 1914), the generals were against it, and if instead of Hitler you had someone more like Mussolini in power, he wouldn't have venture beyond bullying small countries.
In other words, Keynes's prediction was nothing but a series of coincidences,
He thought he understood. He didn't He lost money on the market because he thought he understood, and didn't. He thought his predictions were rational, and they weren't. He believed that if the market disagreed with him it was irrational. It wasn't. He was just a typical smart-ass academic know-it-all who didn't know it all, and blamed the universe for his own ignorance.
What we are discussing, moi drug, is the meaning of "irrational". I'm maintaining that markets only appear irrational to us because we don't fully understand them. You are confusing "irrational" with "unpredictable". Keynes lost his shirt because, being a typically arrogant post-Victorian upper-class Englishman, he of course thought that he was perfectly rational and knew everything. Since the market disagreed with him, he concluded it must be irrational. The truth was that the market was perfectly rational, but it did what it did for reasons of which he was ignorant.
I counter your quote with another: "Everything happens for a reason".
I counter your quote with another: "Everything happens for a reason".
What's irrational about being funny? Comedians live by making rational predictions about what will make people laugh. Perhaps a movie of your daughter throwing spaghetti, in the hands of the right director, could make millions.
The act is emotion. Not based on logic. So nice try.
Also, on the CAD isn't moving to fundamentals theory...
"* 21 May 07: 19:33GMT (NYC) - FX NOW! USD/CAD, EUR/CAD flows - BoC's Dodge: most of CAD rise based on fundamentals
BoC's Governor Dodge was on the wires, and the prepared speech was focused on global imbalances - somewhat of a feature topic for the BoC, which is not surprising given Canada's exposure to the US economy and the global commodity cycle. Q&A delivered a balanced set of comments suggesting BoC sees most of the CAD appreciation based on fundamentals, higher-than-expected CPI needs to be monitored closely, while US slowdown is 'not unhealthy' for Canada, last point clearly referring to inflationary pressures. Given that Canadian markets are closed for a holiday and the BoC's policy meeting is due next week it's not surprising to see the Governor not willing to rock the boat. There is little in the comments to discourage CAD buyers who continue to draw support from M&A and oil prices in the absence of domestic data this week. Technicians (who must be relying on their history books at this point) suggest support around 1.0800/10, and see the current move targeting an extension to the 1.07 handle. VS
"
Also, on the CAD isn't moving to fundamentals theory...
"* 21 May 07: 19:33GMT (NYC) - FX NOW! USD/CAD, EUR/CAD flows - BoC's Dodge: most of CAD rise based on fundamentals
BoC's Governor Dodge was on the wires, and the prepared speech was focused on global imbalances - somewhat of a feature topic for the BoC, which is not surprising given Canada's exposure to the US economy and the global commodity cycle. Q&A delivered a balanced set of comments suggesting BoC sees most of the CAD appreciation based on fundamentals, higher-than-expected CPI needs to be monitored closely, while US slowdown is 'not unhealthy' for Canada, last point clearly referring to inflationary pressures. Given that Canadian markets are closed for a holiday and the BoC's policy meeting is due next week it's not surprising to see the Governor not willing to rock the boat. There is little in the comments to discourage CAD buyers who continue to draw support from M&A and oil prices in the absence of domestic data this week. Technicians (who must be relying on their history books at this point) suggest support around 1.0800/10, and see the current move targeting an extension to the 1.07 handle. VS
"