Goldman Sachs and Citi were on opposite sides of a USD/CAD trade. Who won?
A look back at two trade ideas
On August 28, both Goldman Sachs and Citigroup issued trade ideas on the Canadian dollar. Let's have a look at they did.
Goldman Sachs recommended buying USD/CAD with a target of 1.3600 and a stop at 1.3050.
"Unlike most of its G-10 peers, the BOC has not signaled a readiness to ease policy -- but we think that shift will be coming soon," strategists Zach Pandl and Karen Fishman wrote.
The BOC hasn't made that shift. The September statement was surprisingly neutral and the market is now pricing in just a 14% chance of a cut in October and a 26% chance of a move before year end.
The trade made a bit of headway in the first three days, rising to 1.3380 briefly on Sept 2. But that was the peak and as the trade winds shifted towards a deal, the pair fell to 1.3134 -- 84 pips from the stops.
Despite the moves, no limits have been hit and the trade is still open but with a 50 pip loss.
How about Citi?
They said to sell the pair at 1.3249 with a target of 1.3015 and a stop at 1.3375. Here's what they said:
We continue to believe that CAD will outperform the rest of the G10 commodity bloc. Strong domestic fundamentals, ties to a healthy US consumer, and less trade exposure than its peers suggests that the market is overestimating BoC cut risks this year.
They were generally right. Canadian data continues to outperform and the Bank of Canada wasn't as dovish as feared.
However they were stopped out on Day 4 of the trade in a brief rally to 1.3383 -- 8 pips above the stop. The pair then fell 260 pips in six days.
What's the lesson?
You can be right and still be wrong. And you can be wrong and get away with it.
Citi had a better read on the underlying fundamentals but they stop was too tight and they got taken out. Goldman's trade was in the money for a few days and that was an opportunity to take profits. But even when it went against them, the stop was wide enough to fight another day.