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Fed Creates The Santa Rally Dec. 18, 2014

December 17
23:42 2014

Can A Fed Induced Santa Rally Keep Going?

Leave it to the Fed to create the Santa rally all on its own. The question is will it keep going. I have my doubts but while the language of the Fed statement didnt really change Yellen did let the “couple of meetings” slip and when forced to give more details on what a couple meant she did say two. Yes to us a couple is two all day long but to a Fed member it could easily mean five which is why they had to press her on it.

So after two more meetings they will raise rates right? Well lets just say the US economy is plugging along still then and there isnt any real bad data to make them hesitate. They will never raise rates to any sort of normalcy because they cant. Sure they can raise the token 0.10% and I am sure they will do that eventually just to try to maintain what little credibility they have still. However that gives them ten rate hikes at that level before they reach a full 1%. Cool huh? The main reason they cant raise rates significantly (like they should have already) is the US government wouldn’t be able to even service their debt since just a few point rise in interest would make the total tax revenue the IRS brings in for the US government go to just pay interest and eventually there will be a default. Not that there isn’t going to be one day but the longer they can put off the day of reckoning the better.

There is also something else in the derivatives markets as explained in an article this morning. As you can see we are in agreement on the US debt as well but derivatives arent something I follow

Currently, the US has over $17 trillion in debt. The US can never pay this off. That is not some idle statement… we issued over $1 trillion in NEW debt in the last eight weeks simply because we don’t have the money to pay off the debt that is coming due from the past. Since we don’t have that kind of money, the US is now simply issuing NEW debt to raise the money to pay back the OLD debt.

This is why the Fed NEEDS interest rates to be as low as possible… any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year.

So the Fed wants interest rates low because it makes the US’s debt load much more serviceable. This is why the Fed keeps screwing around with language like “after a considerable time” despite the fact that rates should already be markedly higher based on the Taylor Rule as well as the state of the US economy: it’s all a ruse to pretend the Fed has a real choice in the matter.

However, there’s an even bigger story here. Currently US banks are sitting on over $236 trillion in derivatives trades. Of this, 81% ($191 TRILLION) are based on interest rates. Put another way, currently US banks have bet an amount equal to over 1,100% of the US GDP on interest rates. Guess which banks did this? The BIG BOYS: JP Morgan, CitiGroup, Goldman Sachs, and Bank of America.In other words… the Too Big To Fails… the very banks that the Fed has bailed out, and done everything it can to prop up. What are the odds that the Fed is going to raise rates significantly and risk blowing up these firms? Next to ZERO.

Having said all that the answer to the Santa Rally question is. Heck yea it can. All it takes is the hint from data that gets them a little twitchy and somebody slips the QE rhetoric again and presto we have a sustained stock rally. However the probability of any sustained rally on the possibility of the Fed raising rates is much lower.

On a side note I did watch an interesting documentary yesterday that most everyone should see. Called The Freedom From Choice. Its on RT again today but the link shows a rentable version on vimeo. Well worth the $5 rental fee.

EUR/USD Tanks As USD Strength Returns

The 190+ pip move on the EUR/USD again reflects the potential craziness in trading during this time of year, let alone the new abnormal Fed driven markets. The potential for this continuing is questionable considering it will take a break of the monthly highs on the USDX as well. If I were trading the best levels are at 1.2370 for the short while I would still be open for the long with a stop run to 1.2320 being its yesterday lows and has already found support as the Asian lows this morning. Any conviction below and it will likely test the next daily level around 1.2245.

EUR/USD Hourly chart 12-18-2014

GBP/USD Drops 200+ Thanks to Fed

The GBP/USD also tanked starting at the NY open even though the early CPI data was as expected. There was a nice set up for the short an hour or so before NY open after they showed the conviction for the down move during early London. Good job to any of you die hards out there that took that trade (Nessy LOL). Again the probability for a continuation is questionable so being open on direction until they show conviction below yesterdays lows is safest. The best short level is at the psych 1.5600 and potential long from a stop run to the lows yesterday.

GBP/USD hourly chart 12-18-2014


EUR/JPY Holds Tuesday Chop Range

Its no surprise the EUR/JPY held inside Tuesdays range while they push the USD around. This is a typical move when the EU and UJ are running opposite directions. Being open on direction for this pair is best until they show what they will do pushing the Yen. The only change is a drop in the upper level for a potential short at 146.72, otherwise the story is the same as yesterday with the inner levels more risky. Being the 147.72 is also a daily level its slightly less risky but I wouldn’t rule out the potential for a stop run to the 147.00.

EUR/JPY Hourly chart 12-18-2014

Forex News Today

The calendar starts with German IFO Business Climate expected to rise but baring any large miss I expect they will still be digesting the Fed Meeting today. The same goes for UK Retail Sales but if this drops below zero then it should spark more GBP weakness and send the EUR/GBP up and GU down.

The US has Thursday Unemployment which should be a non event as long as its close. Later is the Philly Fed Index expected to be more realistic with a drop but the recent large misses in this data keeps me cautious.

JPY traders have the BOJ press conference tomorrow so be ready for the spike in the Yen crosses

Happy Trading




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