Bluffers Always Raise – to call or to fold

This post is an update on our previous one where we hypothesized that Bank of Canada’s (BOC) first rate hike was a mistake and that if crude oil prices continue to fall then the BOC would have to retrace its steps. Since then, we have had another BOC meeting and to our surprise they hiked again. Judging by the market’s reaction, this came as a huge surprise and the Canadian dollar (CAD) rallied close to 200 points against almost every currency. We remain short CAD but we are getting cautious about our presumed catalyst.

Indicators we watch are painting an oversold crude oil market but price action, so far, is muted. Nonetheless, we remain cautious on our bearish outlook for crude oil. We will watch the tape and let prices dictate our conviction. If crude oil prices make a sustained break above current levels around $50 we will lose conviction on our short bias until prices get back above $61. In that event, we will look to exit our short CAD trades with the intention of re-entering when WTI crude oil prices get to $61/barrel.

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