Wednesday, April 29, 2009

More Bank of Canada stuff

Back in January, I asked: Has Carney lost it?

I won't rehash, but clearly he has tempered his ridiculous tune from three months ago, in his update last week.

The recovery has been pushed out a quarter and tempered a little for 2009, but 2010 remains relatively robust. I still think that he is guilty of dreaming in technicolor but the thing that stuck out for me was the following:

Conditional on the outlook for inflation (emphasis mine), the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.

He has now pledged to keep interest rates at 0.25% for 14 months at least provided that inflation stays in check. There is no mention of exchange rates. I am not quibbling with the rate cut or the statement, just wondering aloud:

This is not my forecast although it is a possibility in my view: What if the Canadian dollar drops back to 62 cents or worse (if falling commodity prices and stock prices continue later in 2009 and 2010)? Is there any scenario where the Bank of Canada would have to step in to raise interest rates to defend the currency? Is that price lower than 62 cents? Is it 50 cents? I remember a time in the early 90s when the Bank of Canada was forced to raise rates by 2% to defend the currency. Once again, I am not predicting this, but given the speed that the Canadian dollar dropped in the fall of 2008, a 62 cent dollar in this recession is not impossible. Obviously, if the Bank of Canada feels that it needed to raise rates, it would do so, regardless of the statement above. I am just wondering:

1) if it even has a plan for a run on the loonie (I suspect that it does)
2) if it does, did it purposely leave out mention of the loonie in its statement above because it would incite fear and would serve little purpose (I suspect this to be the case)?
3) Does this statement come back and haunt the BoC one day, if they have to reverse course, and/or does it give speculators the ammunition to launch an attack on the loonie since the BoC has pretty much ruled out an increase?

FYI: I am long both Canadian and US dollars but getting longer the US here and less long the loonie with every passing day. I see a move to the 76-77 range, and if that breaks, to the low 70s. I can also see a run at 62 cents, if the doom and gloom returns.

Monday, April 20, 2009

Six weeks is over

The "mother of all bear market rallies" has now completed its sixth week with a 30% gain. As I stated in March, I would give this market the benefit of the doubt for six weeks. I am happy that as someone labelled as a perma-bear, I was able to see this coming.

However, Adil Burney the forecaster was much better than Adil Burney the trader.

-First of all, I got whipsawed out of most of my longs at the end of March on the sharp 2 day pullback. Certain things caused me to think twice and I was not able to reenter my longs as the market soared in April, as I had expected.
-My few longs have stunk (gold stocks), but I feel very bullish in the long term on this, so I am allowing some leeway for these.
-The good thing was that I converted almost all of my US dollars to Canadian dollars
-The best thing for a bear like me though was that I did not short. I suspect that we will hear of a few blowups on the short side (30% in 5 weeks will do that) in the next few weeks.

Where do we go from here?

-I think the "easy move" (it wasn't that easy!) is over. I don't think that we test the March lows or anything just yet, but after 6 straight up weeks (with only modest 2 day selloffs) and 30%, a nice Fibonnaci 38% retracement may be in short order. That would take us to S&P790-800ish (or about 10% off the top).
- I am still very bearish on the intermediate and long term, but I am weary of shorting just yet, as we must allow for a further rally later this spring/summer. The problems in the economy are too deep and there is way too much bullish sentiment out there in my opinion.
-I will watch the action in the coming days and make adjustments accordingly.