Short-term: USD long view challenged

I'm still waiting for that ingenuous trade idea to pop into my head. Everything seems to be challenging my USD long view right now - at least in the short run.

Given that lack of inspiration I'm turning to a country that's known for being just as neutral: I like the EURCHF chart below. Nice trendline that's been confirmed a couple of times since 2007.

Open positions as of 18/01/2017 9:00am CET: Flat

Realized YTD return: +0.7% from 2 trades

The word is spreading: Denmark is not Switzerland

Since the SNB failed to maintain its CHF cap on 15 January no day goes by without new headlines about leveraged hedge funds betting against the EURDKK exchange rate band. Denmark's central bank has so far been able to fend the specs off quite successfully. As I wrote last week, the cases of Denmark and Switzerland are just too different and should not be compared due to two facts:

1) The DKK is part of the ERM II. That means both the Danish central bank and the ECB obligated themselves to defend the EURDKK tolerance band.

2) Denmark's economy is not nearly as solid as Switzerland's to justify that much DKK appreciation versus the euro even if the peg were to break down. Unlike the CHF, the DKK is no safe haven currency.

It's good to see that more people are trying to talk some sense into the EURDKK short speculators, like Marc Chandler did in his commentary on Seeking Alpha.

Why the DKK is different from the CHF

As soon as traders had digested the CHF turmoil, they began to turn their attention to another currency whose exchange rate is pegged to the euro: the Danish kroner. Many have surmised that Denmark's central bank would not be able to defend the peg once the ECB started its QE programme. Some analysts have even gone so far as to say EURDKK Short would be the "trade of the year 2015". However, the DKK peg is different from the CHF peg for one important reason: The Danish kroner has been part of the European Exchange Rate Mechanism ERM II since January 1999. The CHF peg, on the other hand, was only introduced temporarily in an attempt by the SNB to stop the franc's rapid appreciation relative to the euro, which had been under selling pressure from the 2010 riots in Greece up until Mario Draghi's "whatever it takes" pledge to protect the currency. That made the EURCHF floor a unilateral monetary policy tool.

Athough the standard ERM II fluctuation band is +/- 15%, it was decided that the EURDKK exchange rate must deviate no further than 2.25% from the central rate of 7.46038. Historically, maximum deviations have been closer to 1%.

While it is true that Denmark has not made any efforts to adopt the euro yet, there are no signs of the country leaving the Exchange Rate Mechanism either. ERM II puts the Danish central bank in a more comfortable spot than the SNB because according to the mechanism "intervention at the margin is, in principle, automatic and unlimited", meaning that both the ECB and the national central bank will intervene to prevent the currency from leaving the mutually agreed upon fluctuation band. Given that the EURDKK exchange rate peg was agreed upon bilaterally, it is far more likely that Denmark will be able to defend the currency peg with support from the ECB.

Nevertheless, the country's central bank must obviously intervene in the markets to do so. It has already lowered interest rates twice since 15 January (the benchmark deposit rate is currently -0.5%) and temporarily suspended bond sales until further notice, which is an unconventional way of reducing DKK demand by shutting down a channel through which investors could purchase kroners. The central bank is surely looking into further (and stronger) monetary policy measures just to be ready if hedge funds begin to seriously bet against the EURDKK floor.

Either way, EURDKK is an unlikely candidate for a trade idea at the moment. USDDKK will likely continue to go up, but expressing that view is pretty much the same as going EURUSD short, which is what I would consider to be a more likely candidate for "FX trade of the year 2015".