Forex Thoughts : The Deflationary Mindset

4 days, 2 major events and we had a topsy turvy month end into the last month of the year.

The OPEC meeting on Thanksgiving started the ball rolling with no cuts to oil production and panic ensued among the governments and all their oil price projections for next year’s budgets, which of course, led the S&P 500 to a new record high of 2075 last Friday and commodity currencies taking a beating.

wcrs post opec

Sunday’s Swiss gold referendum, to me, sealed the fate of Gold in the eyes of the public – archaic barbarous relic that is a 6,000 year old bubble.

So much for Willem Buiter’s comment that , who happens to be Citibank’s chief economist, on Gold’s “insignificant intrinsic value”, his observation of is that money derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value”.

Yes. Money is just about as good as gold when things turn south which is why the interesting development out of India where the gold import rules have been eased, allowing locals to buy gold without having to re-exporting 20% of their imports.

My main peeve with the entire debacle is that we have unwittingly stepped into the realm of a deflationary mindset, a dangerous word for the central bankers of the world.

When confronted with the prospect of deflation, good or bad, expectations change.

By good deflation, we are supposing that aggregate supply of goods from eg. technological advances, improved productivity, etc, increases faster than aggregate demand, resulting in falling prices. Bad deflation happens when aggregate demand falls faster than any growth in aggregate supply, for instance, when we have a recession.

In this age of central bank participation, it is impossible to ascertain how price action will develop because we cannot have central banks easing and injecting liquidity for deflation to set in only in selected asset classes which will undoubtedly spill over into the rest of the economy and we can say goodbye to the wage inflation we have been hoping for.

And this means the picture gets murkier than it was last week when I pretty muddled and only held to my short USDJPY that managed to clear a new 7 year high earlier today before coming off quickly after the news of Moody’s downgrade of Japanese bonds as Gold recovered all losses after the Swiss vote on expectations of additional central bank stimulus.

GOLD CHARTDaily chart of Gold’s rebound today after breaking lower on the Swiss Referendum results.

jpy weeklyWeekly chart of USDJPY at 7 year high earlier today before giving up the gains.

Well, we have enough central bank speeches, rate decisions and economic data this week which will end in a big bang with Friday’s US Non Farm Payrolls.


And for the little countries, what was seen as a good thing with lower fuel costs that allows subsidies to be scrapped, has now become a double edged sword as commodity revenues fall, putting budget targets even more out of reach like in the case of Malaysia today after Petronas announced that levies paid to the state will be reduced. Yes, the market will have problems with Malaysia going ahead.

My view is that we shall see crude take a breather in the days ahead, after falling for 5 consecutive months since June this year and losing nearly 40% in price terms. But it remains to be seen if we close the month lower or not.

The USDJPY is now seen as a bane as Goldman reports that further JPY depreciation has become a burden with Japanese bankruptcies soaring with the higher USDJPY.

Japanese bankruptcies

The Japanese snap elections will take place on the 14th of December with Abe still enjoying a lead over his rivals although public interest has plunged.

I will stick to my USDJPY short (s/l 120, target changed to 116.50 now). Gold is also a Sell at current levels, 1184 – deflation, remember ?

My view on AUD :
“Given the high chance we will see 0.84 next week, I would look to buy the AUDUSD at the 0.8350-75 zone and again at 0.8150, to target 0.87 in the medium term.
My medium term target for the EURAUD is 1.38 and AUDCAD is still 0.99-1.00.”

Central banks and economic data will continue to throw confusion about the marketplace and the market will work themselves into a frenzy ahead of the big central banks, second guessing additional stimulus to be announced.

Guess away, I say.