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Are we there yet?...

The price action of the last couple of weeks is agitating the previous 100% deflation positioning of the Detma model.  As the above daily Detma output shows, the MTI has been triggered for the AUDUSD, EURUSD, USDCHF, USDCAD, EURCHF, EURJPY and AUDJPY.  As a consequence Detma has reduced exposure to all of these down to 60%.

D6 bought NZDUSD at this morning's NY close reducing exposure there to 30% short.  The reversals for D6 on GBPUSD and USDCHF will probably be triggered tomorrow further reducing the long USD exposures.  So what is going on?

The causes of this back filling of the deflation trade may be a mixture of many things but one thing that I cannot see any evidence of is that there has been a fundamental change in the global economic condition.  The housing and employment numbers out of the U.S. do not give any indication of any pick up in expectations of a consumer led recovery.  Last night's CPI numbers in the US show that inflation is dead in the water and in fact prices are falling.  No matter what spin is put on it, deflation is occurring in the major economies of the US, Europe and Japan and with interest rates at 0% to 1% where is the stimulus going to emanate from to arrest it?

The current European sovereign fiscal tightening is only going to further slow things down and along with the Americans, they cannot do anything but print more money to try and inflate their economy.  Scary isn't it.  Does it sound like we are playing the mother of all Monopoly games where the banker has gone bananas and is slipping everyone an extra $500 note every now and then just to keep them going?  Except that the money is not being used to buy anything and thus bid up prices.  Instead that new money is being used to pay out old debts.

In this environment it is hard to see commodity currencies like the Aussie and Kiwi going much higher.  Stock markets will also begin to fall soon.  Why?  Because deflation will cause a fall in prices across the board.  Inflation will resurface with a vengeance eventually, but first we have the deflation to contend with.

I do think that eventually this will all sort itself out but we still have not taken our lumps for the mess we created in the first decade of this 21st century.  And we have to take them. 

At the time of writing the AUDUSD is testing .8700 for the second time today.  The chart at right shows the 3 wave corrective scenario discussed yesterday.  The "c" and final wave of this correction should be terminating here and it does look like a diagonal 5th on the hourly charts.  The Aussie often tops out with this formation. 

Having said all of that, a view does not the market make so if it breaks .8725 I will be squaring my shorts.  Maybe the time to short the AUDUSD is next week after tonight's quadruple expirations wash through.

Supporting this topping scenario on the AUDUSD is the fact that the EURUSD appears to be nearing completion of a corrective wave iv of 3 of a 5 wave series down from 1.5000 to around 1.1000.

The correction of the deflationary (risk off) trade that has been going on over the last couple of weeks is only just that, a correction.  A lot of water has to flow under the bridge yet before we can say that we have fixed the problems caused by the excesses of the debt laden consumption binge of the last 30 years or so. 

Now that the bubble has finally burst on excessive debt, this self adjusting deleveraging process will grind onwards until it resets itself and nothing that central banks do will arrest its progress.  

Frank


Disclosure: Short AUDUSD