Recap for Week Ending 7/6

Trading was choppy this week due to the U.S. holiday on Wednesday. Most of the action occurred on Thursday and Friday, when the BoE voted to hike its benchmark rate by 25 basis point and when CAD-positive hit the wire. Unfortunately, I missed most of that. In fact, my portfolio gave back 1.40% this week.

Because there were no major movements on Monday, Tuesday and Wednesday, I got bored and started playing around with synthetics. At one time, I built a zero-interest portfolio with AUD, USD and TRY long, CHF, EUR, NZD and XAU short, and CAD and JPY neutral. It worked pretty well. The value of the portfolio (in terms of USD) didn't fluctuate at all for about 72 hours. But this exposure-neutralization got old quickly and eventually I took up a whole other distraction: Prison Break Season One on DVD.

Wednesday next week should be interesting as the Bank of Canada meeting unfolds. The market expects a 25-basis-point hike and most of this has been priced in. If the BoC acts according to market consensus, USD/CAD bearish sentiment will be even more bearish. In contrast, if the BoC appears indecisive, sounds dovish, or does not raise rate, then the current USD/CAD technical selling will reverse course. Either way, my exposure should allow me to extract some profit.

The problem is, my functional currency is the U.S. dollar; I cannot diversify away from it. If the U.S. keeps running a current account deficit with the rest of the world, the value of (and profit generated from) my portfolio will evaporate with the erosion of the U.S. dollar. This means I'm losing real buying power even though my capital keeps multiplying itself in nominal terms. Someone who is mediocre at trading could be becoming wealthier than me because he is holding a currency that does not depreciate in real terms. Perhaps I should shift my focus from nominal to real terms. Or not.