$USD

One of the most overdone trades out there is long $USD. I have mentioned earlier that I don't see how the F_E_D can raise rates with the Global race to debase. Just think about the Yen and the BOJ's QE-zilla, the expanded ECB asset buying program which of course debases the EUR and the already strong dollar (with the end of QE and looming rate hikes), this causes a problem for F_E_D rate hikes "IF" they are truly data dependent.

Without getting off on another rant, it is my opinion that the F_E_D is locked on a course of rate hikes sooner than later and them having nothing to do with data dependency.

I first put the theory of policy normalization forward a couple of years ago, that the F_E_D, even as they unleashed QE3, had made their intentions regarding certain policy known that seemed they were already in the planning stages of a exit from accommodative policy. One of the first hints was talk of a new measuring stick for guidance, rather than quantitatively based as in, "We intend to do "X" by "X"", the F_E_D hinted they'd move to qualitative guidance which is to say , "It depends on the incoming data", but we all know that quantitative guidance is determined by qualitative analysis, so why the change or at that time, the possible change in the yardstick? At the time it was my guess that the F_E_D wanted to allow for ambiguity and interpretation so they could exit accommodative policy even if the data didn't support it. Fast forward a couple of years and at the last F_O_M_C meeting the F_E_D not only removed the dovish, "Considerable Time" language, replacing it with "Patient", but they essentially upgraded the US economy/outlook while admitting inflation expectations are likely to be subdued with oil being cheap, but that this was a transitory event.

To hike rates the F_E_D needs to be or act convinced that the economy is taking off, that the employment situation has improved substantially and should remain on target to continue to improve and that inflation expectations will move toward their long term 2% goal, even though all F_E_D inflation projections have been dead wrong for 2.5 years.

What the F_E_D did recently has me pretty well convinced that they are set on rate hikes and getting off ZIRP ASAP, these actions include not waiting to hike rates until inflation moves toward the 2% target, but put language in the policy statement that they would hike rates BEFORE inflation moves in the appropriate direction as long as they "FEEL" that inflation will head toward their long range target. Well we know by 2.5 years of fudged inflation expectations that the F_E_D can say anything it wants regarding inflation and hike rates any time they want based on simply saying, "We believe inflation will head toward our long term goal, even though it's moving in the wrong direction now, because we feel that the current environment is TRANSITORY".

They also, amazingly upgraded their outlook of the US economy and as such employment which the CEO of Gallup just yesterday called the unemployment rate of 5.6% a "Big Lie" perpetrated by the White House, Wall Street and the media. We already know or you know now that the easiest way to knock down the unemployment rate is to exclude the unemployed from the workforce, thus making the unemployment rate look lower because once you are no longer collecting unemployment benefits (with extended benefits cut last year in the US Budget, knocking some 3.3 million Americans off the extended benefits for 2014 alone), you are no longer considered part of the workforce, thus no longer counted which did wonders for the unemployment rate, but as the CEP of Gallup said, it's a Big Lie", but one necessary for the F_E_D to hike rates.

The F_E_D also talked about the US economy in glowing terms, upgrading it despite the fact that the Bloomberg Macro Economic Surprise (negative) Index registered the start of the new year as being the worst in over a DECADE! You might recall that Q3 GDP came in at 5%, granted, it received a HUGE boost due to Obamacare, which is perverse if you look at how much Obamacare actually represented of that 5% print, but you may also know that the Q4 GDP came in at almost half of Q3 at 2.6% (annualized).

The one thing I mentioned recently on several occasions was the difficulty the strong $USD will cause for the US economy as it seems nearly everyone else around the globe is debasing their currency while the $USD stays strong and that this could be a problem for the F_E_D to hike rates as the strong $USD would have negative impacts on the economy, specifically exports. I also said that I've seen 3C indications of $USD currency moves in the charts that seemed impossible at the time, but the charts were correct and only after the fact did we find out why, but the charts for the $USD have not been all that negative so I wasn't sure how they'd get around this.

Fast forward to this morning with the release of the US Trade Deficit for December  which came in at a miss, printing at a surge of 17.10% for December alone all due to the strong $USD, the deficit came in at $46bn for December vs consensus of $38 bn and the revised previous of $39.8bn; this is the widest deficit since 2012 and the biggest miss since July of 2008!

The first thought for most commentators... "Here comes the Q4 GDP downgrade revisions".

I hope the point is made that the strong $USd, especially vs. debased currencies around the world, is troubling to say the least for F_E_D rate hikes which some people believe isn't what the F_E_D wants to do, but based on the talk and changes the F_E_D has made since Qe3 was introduced, it has been a long string of events that has led me to the belief that for whatever reason, whether they want to or not, the F_E_D HAS to hike rates sooner than later. This may be based on the notion expressed by the Bank for International Settlements (BIS which is the central banks' bank) annual report which said, "Macroeconomic policy has little room for manoeuvre to deal with any untoward surprises that might be sprung, including a normal recession."

You can read the whole report here, and I'd at least read the section titled, "A balance sheet recession and its aftermath".

In any case, before the Trade data came out this morning, the Euro (Euro Crosses) were aggressively being bought in the overnight session after the ECB cut off Greek Banks' ability to pledge domestic debt as collateral under an ECB waiver, an obvious political move aimed at forcing Greece to come to the table and take whatever they are offered rather than act like uppity upstarts. The obvious reaction was going to be capital flight out of Greek banks and in to safe havens, one of the leading safe havens would naturally be the Swiss Franc, so after the ECB action yesterday late in the day time session, we saw the Swiss National Banks' (SNB) soft ceiling for the Swiss Franc of $1.05 - $1.10 (EUR/CHF) breached.

 EUR/CHF plunging just after Draghi cuts Greek Bank collateral. Thus all of the EUR cross buying in the overnight session which was heavy and said to have hit the stops in EUR/USD today at $1.15 (although I can't verify $1.15 specifically, it was very close and there was a huge surge of trades right around the level which was said to be a breach of $1.15 (which I can only find to be very near as in $1.1496 and the like- although judging by the trade count in the area, stops were hit at a breach of EUD/USD $1.15)

Note the EUR/CHF above is defended as the soft ceiling of $1.10-$1.05 was breached, thus the talk this morning in FX circles was it was the SNB buying up Euro crosses in order to defend their ceiling on the Swissy. Frighteningly, it is estimated it will cost the SNB CHF $10 bn to defend their soft cieling and that was an estimate BEFORE the Greek baks had their collateral pulled yesterday, making the exodus out of Greek banks and in to the Swissy inevitable, thus the reason they were out in force this morning and today trying to defend their currency. Estimates are that the SNB will spend more than Switzerland's GDP defending the ceiling.

As such, EUR/USD driven higher and apparently breaking the $1.15 level, hitting numerous stops.

As usual, everything is connected to everything, it's the "Butterfly Effect", the ECB punishes Greece in order to bring them to their knees and accept the terms or, well they are already getting a taste of the chaos of bank runs and the potential collapse of their financial sector which is why I said the Greeks having lost their position of strength in a single day are now more dangerous than ever, like a wounded animal forced in to a corner, Europe and the ECB may VERY WELL regret their decision to push the new Syriza led government in to a corner.

In talks today with Germany's FinMin, Schauble said that he was advised by his press secretary to say they agreed to disagree to which Greece's FinMin said they didn't even agree to disagree.


In any case, this is really more about the $USD and a few interesting charts have popped up, I don't know the how, why or ifs, but it looks like this...

In one of the most overcrowded trades, since 2015, there's a large negative divegrence in the $USDX, thus a short squeeze here could prove epic. I don't know how this may be achieved, I don't think the SNB can purchase enough Euros to cause this kind of divergence to show up, but it's there and with it, perhaps the answer the F_E_D needs to weaken the $USd and hike rates.

I'll be following up of course, but for now, this is one of the stronger, most unexpected charts out there. Ironically the last time I saw a strong divergence that I could make no sense of until it moved and later we found out why, it too was the $USD.