Detma Markets

The late hour epiphany...

2010-06-30T12:28:00.000+10:00

As discussed yesterday the Detma model is gradually getting itself short USD. Cutting my short AUDUSD position and going long AUDUSD and EURUSD may have been a late night epiphany, or just the meanderings of a tired mind, but somehow when I woke up this morning it didn't feel that bad.

In reading the scuttlebutt this morning it seemed that overnight the maws of hell were about to open up and swallow the world. However at 11.30 pm Sydney time last night (9.30 am NY), the EURUSD was around 1.2200 and this morning in Sydney it was 1.2190, having dipped to 1.2150 overnight. By all accounts a tight range on the EURUSD but I'm sure that for those trading it it didn't feel that way. The chart at right shows an inverted SHS formation on the EURUSD. It also shows, that using a generic trend indicator such as a 13/21 day oscillator, that the pressure is approaching the buy side.

By all accounts the EUR is oversold against everything - the CHF, GBP, AUD - you name it. I'm backing long EURUSD for now.

The AUDUSD was more problematic. From the .8550 area when the epiphany struck it was heavily sold down to a low of .8460. However the way the EUR was holding lent strength to the AUD long scenario and so I managed to hang in and improved the average this morning. The chart at left shows what a bullish EWT count on the AUDUSD would look like. This .8460 is the Fibonacci 50% retracement of the rise from .8080 to .8860. The 50% retracement is a good one for wave 2 retracements. So who knows? I could be barking up the wrong tree entirely but as I say above I'm punting that the model is getting the short USD scenario right and I'm keeping my positions small enough for now so as not to cause too much damage.

Frank

Canary in the coalmine....

2010-06-29T23:54:00.000+10:00

Detma went 100% short USD versus the GBP and CHF on the NY close this morning Sydney time. The model has been slowly but surely shorting USD. It is also 100% short USD versus NZD, JPY and SGD. It is still 60% long USD versus the EUR and 30% long versus the AUD and CAD.

I have described before that Detma is a medium to long term trend following trading model. As such its only input is the price action which it filters according to its proprietary algorithms and from which it determines a BUY or SELL signal. The point I want to emphasise is that the directional positioning of the model is entirely determined by the price action. As such there is no human interpretation of what is going on. The model is short or long because the price action tells it to be that way.

It cannot be fooled or distracted by spurious news stories for example. It can generate spurious signals when the market is chopping around and that is how it pays back. It will get onto emerging trends early because it is always invested. It does not know however, whether the next signal that it takes will be a fizzer or a multi month trend.

It is generally accepted that the USD is heading for a big fall because the U.S. intends to inflate (print money) itself out of its catastrophic economic situation. It said at the recent G20 meeting that it needs growth. And guess what, it can print dollars with impunity. However the rest of the world won't like it that much so they will sell their USD holdings. The BIG question off course is when is the USD going to start its slide.

This is where the systematic process can come to the fore. So here is the question. The current increasingly short USD positioning of the Detma model can be the proverbial canary in the coalmine warning us of the early onset of a long term decline in the USD or it is a series of signals that are simply reacting to an overbought condition.

This time I am going to pay attention to the current alignment of the model and am squaring my short AUD position and I am going small long EUR and AUD against the USD - just in case.

Frank

Irrational exuberance....

2010-06-28T15:10:00.000+10:00

Irrational exuberance would be a good term to describe the AUDUSD's ascent on Friday night and this morning in Sydney. When looking for an explanation to the sudden rise from .8600 to .8750 on Friday night I can only imagine that it is related to the poor GDP numbers out of the U.S.

In some perverted sense now, bad is the new good. The logic being that if the U. S. economy is under performing, then the Fed has to maintain and probably increase its rate of money printing. This in turn will increase inflationary forces which will push commodity prices up and thus the commodity currencies are well bid.

The sting in the nettle for these commodity exporting nations is that even as their terms of trade increase their balance of payments situations worsen. This is because as demand for exports increase so does demand for external borrowings which primarily are directed towards those exporting enterprises. The exports are priced in USD and so are the borrowings. Once reality strikes the world economy, and a tsunami of deflation hits, these commodity prices will fall but the debt will still be there. Somehow the nation will have to continue to find the USD to pay the interest and principal on these loans. The same thing happened to Mexico with oil in the early '80s.

In other words commodity currencies are prone to bubble behaviour as hot money comes into the sector. When the market turns look out!

The AUDUSD chart still looks bearish to me. The AUD often retraces fully before making a fall. It did it when it was making the top at .9300. This retracement to .8777 this morning may well be that - a retracement.

Position wise I continue to sell the rallies.

Frank

Mirror, mirror on the wall....

2010-06-24T19:00:00.000+10:00

Last night's price action on the AUDUSD was mystifying to say the least. It continues to track the S&P500 tick by tick in a relationship that only highlights the shallowness of today's financial markets. They are shallow in that they are not being driven by genuine trade considerations, or company profit expectations. Rather the markets seem to spin and swivel on a whim, with both volume and number of participants diminishing.

The FOMC statement to leave rates at 0% should not have surprised anyone and yet the S&P500, mirrored by the AUDUSD, decided to spike up as if all of our woes were over. In doing so they completely ignored the previously released US housing start numbers which showed a weakening economy.

It prompted me to have a look at the correlation between the AUDUSD - a commodity currency - and the S&P500. The chart above clearly shows how highly correlated these two markets have been since early 2009. Both are direct representations of the risk on/ risk off trade. Both are affected by temporary flows. The S&P500 the direct beneficiary of Federal Reserve money printing and the AUDUSD the supposed flow on from that into expected higher commodity prices.

The chart at left shows that over the last week the AUDUSD has lagged the S&P500 down. Its not likely that the correlation between the two is breaking so in my view the AUDUSD will likely be falling to around the mid .8500s initially just to adjust to where the S&P500 is.

Detma went 100% long the NZDUSD on this morning's NY close of .7127. Based on my view on the Aussie, it doesn't look like a very good trade to me. Systematic models however don't care about any particular trade. If they trade 100 times in a year, each trade by itself bears no significance. It is the ability to pick up a trend early and sticking with it until it turns that is the inner core of value of these type of trading systems. So who knows, maybe this long on the NZDUSD is a clue that the bearish view on the AUDUSD is wrong? Don't think so.

Frank

So?...

2010-06-23T20:45:00.000+10:00

The Detma model is a fully systematic medium to long term trend following trading system. As with all of these type of systems, it is affected only by the market price action. As a consequence its exposures ebb and flow with the cyclical swings in market sentiment.

Since the end of 2008, these sentiment swings have been caused by the risk on/risk off conundrum that have been plaguing the markets. As a consequence systematic models are in the main in a drawdown of around 10% from the beginning of 2009 and do not look like emerging from it any time soon. Why? Because whenever the markets want to get on with the painful deleveraging that must go on (risk off), governments come in with more stimulus (print more money - risk on). The best graphical example of this risk on/ risk off churning is the AUDJPY.

This cross, as the prime risk on (carry trade) example, shot up from a low of around 56.00 in February 2009 to 85.00 in October 2009. All on the back of the global government stimulus injections that occurred in March 2009. From October 2009 to today, the chart shows the completion of a broadening top formation. This type of formation has two major implications. Firstly it denotes confusion and volatility and secondly they are always topping formations. If you agree that government stimulus via printing money has a short shelf life, then this chart formation will resolve itself to the downside. That is, the deflationary trade will carry commodity prices down and that will push the AUDJPY down.

The long term USDJPY chart has bullish connotations for the JPY. The chart shows a very long term (10 years) descending triangle with a flat bottom. The formation began in September 1998 and decidedly broke to the downside in December 2008. Once a triangle formation such as this is broken to the downside one can look for a drop roughly equal to the widest part of the triangle. That equates to a USDJPY of 50.00. Where AUDJPY would be in this instance is anybody's guess but it will be below 50.00.

So? So what if the Chinese have liberated the Yuan's peg to the USD? That won't improve the trade imbalance between them and the U.S. Exchange rate movements will affect the price of exports and imports but in regards to the actual trade balance, these price movements will result in a change in the volume of exports and imports and not a change in their monetary value.

Remember the Plaza accord in February 1985? That was struck by the Americans, the Japanese and the Germans to mainly address the trade imbalance between Japan and the U.S. The USDJPY fell from 250 to 100 as a consequence of that accord but the Japanese trade surplus continued to increase.

Position wise I'm short AUDUSD. I had to wear a bit of pain last week but I still feel that is the right way to be. It should now not go too much above .8750 and I will abandon the position if it breaks .8780. the AUDUSD chart at right shows the broadening top that has been forming since November 2009. If you happen to own a copy of the indispensable Edwards and Magee's Technical Analysis of Stock Trends, have a look at the chart on page 144 of Air Reduction Co. and compare that to the AUDUSD chart.

Frank

Are we there yet?.....

2010-06-18T19:02:00.000+10:00

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

AUDUSD ready to fall hard

2010-06-17T13:24:00.000+10:00

Hi, I'm back. I have been working on an Australian equities based project and have neglected my blog - apologies.

In time I will discuss what we are doing in Australian equities but for now let's revert to our currency posts - especially since we could be at a very important crossroads for the AUDUSD.

In my last post of 4 June, the AUDUSD had started its .8100 to .8550 range trade. It has, over the intervening time, continued to trade in that range with a break to the topside last night testing .8675.

Crucial to determining where we are with the Aussie is the test of the lows on 8 June of .8080. From an EWT perspective, that move down was 5 waves. It could have been 5 waves down for a c of B, in an ABC upwards corrective - interpretation strongly bearish. Or it may have been a failed 5th wave in the series down from .9300 - interpretation very bullish.

The AUDUSD chart at right focuses on this activity from 21 May to last night. The whole thing looks very much like a three wave correction to me. The only question being whether the C up to .8675 is finished or not. The inference of this count is that the AUDUSD still has at least a test of .7500 on the cards. .8675 is the .618% correction of the fall from .9030 which makes the (i) of 3, (ii) of 3 count plausible to me.

As always only time will tell and again as always, if you want to come along for the ride you have to buy a ticket. What will cause the bearish scenario to evolve - any number of things but watch out for the CPI numbers tonight in the U.S. The AUDUSD doesn't like deflation and if that is what the numbers begin to suggest again then the currency will go lower.

All of this has implications for Australian shares as well. I'm short AUDUSD around here, and have my helmet firmly strapped on. This is not going to be an easy one but as long as .8700ish holds it I'm going with the bearish scenario.

Frank

Bullish one day, bearish the next

2010-06-04T12:57:00.000+10:00

Detma is still positioned for the deflationary trade although it has reduced its shorts in the Euro. The model has a methodology for taking money off the table, or reducing exposure, when it assesses a trend as being extreme in behavior. Through its calculation of the trend Betas it derives a Measure of Trend Intensity (MTI). This MTI has the capacity to reduce 40% of the exposure to a position even though the model signals are still strongly in play.

Detma has reduced its shorts in EURUSD, EURJPY, EURCHF to 60% and has gone 100% long EURAUD. Does this tell me that the EURO has bottomed? Not at all, just that the Detma system thinks that it's a good time to lock in some profits. Doing this never disappoints me because it usually happens after a good run and it reduces the open profits risk. The EURJPY chart shows the MTI buying back 40% of the exposure even though both D6 and D12 are strongly short.

The USDCHF chart at left is another example of the MTI in play. Here it has not been crossed so it has not traded, but note that it will sell back 40% of the exposure if USDCHF touches 1.1380 or lower. This compares to the D6 and D12 reversals which are still way off because of the strength of the trend.

The AUDUSD was very strong on Wednesday and Thursday. It was actually great to buy the dip at .8300 and see profits realised through something going up for a change!. Its failure above 0.8500 however took the shine out of the rise from .8300. Now it seems that we could well have finished the 4th wave discussed May 26. In Elliott Wave Theory (EWT) terms we may be in the beginning of a new cycle down. That is, wave 5 down targeting 0.7500 may now be in play.

Since wave 5 is of at least Primary Degree it will be substantial in both amplitude as well as sentiment. You can expect things to look very bleak at the bottom but be prepared to buy the AUDUSD at .7500 with your ears pinned back. This is because all of this fall from .9400 is correcting a higher Cycle Degree rise from the lows of .6000 to parity plus eventually.

The European Union is making valiant efforts to restructure itself away from the USD hegemony that it has been ruled by since the end of WWII.

The most recent act by them has been to push for greater oversight and regulation of the major credit rating agencies. It just so happens that the big three, S&P, Moodys and Fitch are all American. As a sovereign nation would you really want your well being to be determined by an organisation, based in another country, and which has been shown to be lacking in stature by its selling of AAA ratings to the highest bidder during the sub prime crisis - give me a break. So, in what effectively is the lopping off of the second head of the 9 Headed Hydra known as the Washington Consensus, the Europeans are going to create a new body to be called the European Securities Markets Authority to oversee these agencies. Eventually they will develop their own credit rating agencies.

The EURUSD also showed strength yesterday but failed above 1.2300. Like the Aussie, the Euro was bullish one day, bearish the next. This consolidation between 1.2100 and 1.2400 looks to me like an abcde triangle for a wave 4 in the third wave down. In a nutshell then, there is more downside to the Euro and 1.1000 looks to be on the cards.

Position wise I was happy being long yesterday, but now feel that the downside may take precedence for a while. I'm short AUDUSD and EURUSD but very wary of .8550 and 1.2350 respectively.

Frank

The Month of June

2010-06-02T16:49:00.000+10:00

"What is one to say about June, the time of perfect young summer, the fulfillment of the promise of the earlier months, and with as yet no sign to remind one that its fresh
young beauty will ever fade."
- Gertrude Jekyll, On Gardening

As inspiring as the northern hemisphere summer might be, whether or not that optimism feeds into the markets is another question. There were rumours last night that the Fed intervened in the Euro. That would explain the jumps to 1.2350. Here we are though, going into the European opening back down at 1.2200.

I'm going to back the central banks again and am long EURUSD at 1.2200 and AUDUSD at .8300. Its not a do or die position for me, but I'll stick with it for a while - especially since the month of June might just, just, make people feel better about themselves and the world.

May was a tumultuous month as the market focused on the risk off deflationary trade. This was spurred on by the concerns over European sovereign debt and fiscal positions. As the Detma model D6 and D12 signal summaries show, systematic trend following traders would be 100% long USD and JPY in positioning for this.

As a consequence of this global uncertainty, the Aussie, which relies on steady global growth for its well being, was caboshed again. Whether or not the AUDUSD holds here will depend on whether the EURUSD can hold the 1.21/2200 area. If the EURUSD goes to 1.1000 for example, the AUDUSD will go to 0.7500.

This is all madness of course. We all know that the USD needs to weaken but it is all a matter of timing with the markets.

Systematic models that react to past price action are fully placed for further USD strength. June will be the make or break month for the Euro and stock markets. I'm hopeful of a reprieve from the doom and gloom of recent times so here's hoping.

Frank

RBA pauses for now....

2010-06-01T14:57:00.000+10:00

After 6 increases in the last eight months the RBA is running out of room to move. It can be argued that the RBA has acted responsibly in taking the stimulus out of the system as soon as possible. That would have been fine, if the rest of the world was getting its act together. However the world is not getting its act together, and in fact the real economic tsunami is still ahead of us globally.

A country like Australia, that month in and month out consumes more than it produces, as is evidenced by our consistent current account deficits, needs a world that is ticking along just fine. When the opposite occurs, then our huge Balance of Payments deficits stick out like the proverbial. That's when foreign investors get twitchy and demand a higher premium from Australia for lending us their capital - so we can buy a bigger fridge. This higher premium will come in the way of either higher interest rates or a weaker currency - or both. As you can see from the chart above, as of today we have interest rates much higher and the currency much lower. That will be the way of it in the future for a country such as ours with a profligate attitude towards spending. We are going to have to work harder and longer for less so that we can keep our heads above water.

I wrote about Australia's imports binge and why Australian interest rates were really going up in April so I won't go over it again. Suffice to say that in the context of all of the above that Mr Rudd and Co need to get this resources super profits tax through. Tell the pinstripes to take their bat and ball and go home - we'll dig it out of the ground ourselves!

Anyway, is Australia better off by having tightened so far so quickly? The economic indicators released to by the ABS for Retail Sales and Building Approvals paint a bleak picture. Yes Retail Sales were up, but only for food and Cafes. So we still like to eat and have a coffee. The data from the ABS suggests however that discretionary spending such as clothing and shoes and Department stores is down:

The following industries increased in trend terms in April 2010: Other retailing (0.3%), Food retailing (0.2%) and Cafes, restaurants and takeaway food services (0.2%). Household good retailing (0.0%) remained unchanged. Department stores (-0.3%) and Clothing, footwear and personal accessory retailing (-0.2%) decreased in April 2010.

The Detma model remains positioned for the deflationary trade. The U.K. and U.S. were on holidays last night so we'll see how they pick up the batting today when they get in.

The AUDUSD may now be in the beginning of a fifth wave down to sub .8000. I'm short AUDUSD and EURUSD and will see what Europe does when it gets in. What happens in our time zone is easily overshadowed by the big boys when they come in to play.

Frank

Micawber revisited

2010-05-31T19:03:00.000+10:00

The March 2010 Current Account numbers released today by the Australian Bureau of Statistics are a continuing testament to how Australia is impoverishing itself:

The increase in foreign debt caused by the persistent current account deficits has to be serviced. In 2008 and 2009 Australians had to come up with just under AUD 40 billion in interest payments alone to meet its foreign debt obligations. If interest rates go up, as they must eventually, Australia is going to find it hard to service its debt and maintain its high standard of living.

Even though a lot is being made of the improvements in our terms of trade, we will never earn enough on our trade account to pay back this debt. Now, with the government also going into debt, the situation is at risk of getting worse. We live in a world where debt is increasingly becoming a dirty word, and we have loads of it.

The implications are dire for the currency. The AUDUSD chart shows one current EWT interpretation which suggests that this 0.8500 area maybe the terminus for this bounce from the .8070 lows of last week. If so a push down to 0.7500 could be imminent.

Position wise I'm short AUDUSD but will exit if .8600 breaks.

Elsewhere the Detma model is fully positioned for the deflationary risk off trade. That is, it is long USD and JPY. The JPY in particular needs close watching. It has drifted back down to around 91.50 versus the USD but as we have discussed before, the accidents with the JPY tend to be on the upside. With Detma 100% long JPY the conditions maybe in place for another accident to occur.

Frank

High volatility

2010-05-28T16:57:00.000+10:00

The extreme trend conditions of the last few days were eased substantially last night. The Beta chart shows how much air was let out of the balloon - especially in the AUD crosses. This in turn resulted in the Detma model taking a very large loss on paper on the day.

Systematic models like Detma, by their very nature, utilise a consistent methodology over time. This results in their replicating the function of a filter as it were. That is, on top you get a whole bunch of price activity which is filtered, or acted upon, in a consistent manner by the model. Out the other end comes the performance results. An analysis of these performance results will yield certain risk reward characteristics which can tell us a lot about how the market is behaving at any point in time.

I mentioned yesterday that Detma was up 10.2% month to date. However last night Detma gave back an astonishing 5.6%. I was so surprised by the extent of this retracement that I did a bit of analysis on the results for the currency portfolio that Detma trades. The table at left summarises the results.

Essentially, since I started trading the model on 1 September 1995 to yesterday, 27 May 2010, there have been a total of 3,845 daily performance observations. Of these only 5 have been losses of -5.6% or more. So yesterday's result had a probability of occurrence of only 0.13% - a black swan event by any name.

In fact if you look at the table closely you will see that the entire history of the model had 18 black swan event losses (I'm defining a black swan as an event outside of the 99% level of confidence i.e. 3 stdev) and 29 black swan event gains. Of the 18 loss events, 12 (or 66%) have occurred in the last 18 months since October 2008. now if that doesn't tell you something about the market nothing will. Bear in mind as I mentioned above, Detma has traded these currencies in the same way since inception. So it's not the model that has changed - it's the market.

The first thing that would need to happen if the Detma model were live and running money at the moment would be that the gearing would be maintained much lower than the typical 5 times. Secondly I would be reviewing the entire research that supports the philosophy of Detma. Yes markets definitely do trend but why the extremes in price action. Should the MTI measure be allowed to take more than 40% off the table during trend extremes? Many questions need to be addressed by systematic models at the present. More on this later.

Is the AUDUSD completing a 4th wave? Instead of a triangle its has done an ABC flat correction. What are the stock markets going to do from here? They seem to be leading the way.

I'm short AUDUSD at .8500. I won't be stubborn but if it does hold around here it could be the start of the 5th wave down to 0.7500.

Frank

EURAUD turns LONG

2010-05-27T12:13:00.000+10:00

After 14 months and 4,500 points Detma has turned from SHORT to LONG in EURAUD. The trade generated a 24% on an ungeared basis. It says a bit about the current condition of the AUD if the EUR, currently one of the weakest currencies, can turn LONG against it.

The Detma model continues to benefit from USD strength and is, as at 26/5, up 10.2% for May on a weighted and geared basis. This implies that in general, systematic style CTA funds will be having a great month. It has been a long time between drinks for this style of funds management. After an extraordinarily profitable 2008, systematic trading programs have been chopped around by the uncertainty in the risk on/ risk off trade. Throughout May the risk off trade has been predominant and this has paid off well for trend followers.

The USDJPY chart shows a possible long term EWT interpretation which is very bullish for JPY (bearish for the risk trade). It is worthwhile to continue to keep a close eye on the JPY since Detma is now 100% LONG JPY versus all crosses. My post of 18 May discusses this in more detail. If the JPY goes for a run from these levels, it will push the EUR and the AUD to substantially lower levels.

This would validate the AUDUSD EWT count of a 4th wave in progress with wave 5 down to 0.7500 imminent.

My posts regarding the USD Hegemony discussed the actions that Europe is trying to take to break the stranglehold that exists on their economies due to their dependence on the USD. As I wrote those posts, I wondered how the US financial establishment would show their displeasure at the temerity of the Europeans in trying to regain sovereignty over their economies. How dare they tinker with the established market fundamentalism which dominates the existing world order?

In its article, Geithner Calls for Action on EU Crisis Plan, CNBC states "He then goes to Berlin on Thursday where no doubt German Finance Minister Wolfgang Schaeuble will get a dressing down for his government's unilateral restrictions on speculative trading."

Yes, it's true. Read it and weep!

Frank

4th wave

2010-05-26T16:03:00.000+10:00

The Detma model remains long USD, long JPY and short EUR. No fundamental analysis was required for this positioning. Being a systematic model it just follows the price action. If the trends turn out to be fizzers, then they are forgotten and cast aside. If the trends turn out to be meaningful, as is the case now, then volumes of writings and analysis appear justifying the positions. In the meantime, isolated completely from all of this, the systematic models just continue to tick away.

The Detma model trend Beta chart shown above shows the movements away from the average trend of the last twelve months for each currency traded by the model. To better indicate the speed of some of these trends, yesterday's measurement is compared to the measurement at the beginning of the month. Any Beta measure over 2.5 is extremely "overcooked". The implications are that this trend is likely to either mark time, or reverse in on itself, to bring the Beta measure back down towards 1. If the Beta goes to zero it implies a reversal in trend.

The trend Beta charts for the EURUSD and AUDUSD above show that for daily measurements since 1 September 1995 (3,795 days)both of these currencies have had a trend beta > 3 on only 7 occasions. That equates to a probability of occurrence of around 0.18% - well inside the 3 standard deviation level of confidence.

What does all of this mean? Well, these extreme trend deviations are mean reverting - obviously other wise the world would blow up. I'm not referring so much here to points movement, but more so the rate of change in these moves. That is the extreme trend condition can be moderated through a sideways triangle as much as through a sharp reversal. Therefore, as the AUDUSD chart shows we may well have finished wave 3 of C down and are entering wave 4 for a sideways triangle that may last a few days. It implies that there is still an end of the world panic sell off to around .7500 to come. Maybe that will force the authorities to get behind this and act resolutely to calm the markets - if they can.

By the way, in my post "The Mother of all Bubbles" of 27 April I had this count as one of the possibilities for the AUDUSD. So far it is panning out very closely to this. What this implies is that at around 0.7500 the Aussie may be the buy of the century.

Frank

Garage roof

2010-05-24T17:54:00.000+10:00

I'm still here. I haven't been writing any posts the last couple of days because i) I'm putting a new roof on my garage; ii) my post of Wednesday 19 May "the Nine Headed Hydra" says it all for me for now and iii) well I had a good week so I'm laying low a little bit.

I'm still long EURUSD though and I'd like to buy some AUDUSD or AUDJPY. Tried this morning but it came off in such a hurry and due to i, ii and iii above, I didn't stay in - ^&;&;*%$$%%!!

The systems have had a great month but due to the speed of the fall, the reversal signals are a long way from current spot. We may see the systems pay back substantial amounts if the Euro reverses from here.

Frank

This is Germany speaking

2010-05-19T16:52:00.000+10:00

Germany, the undisputed leader of the EU, which in turn is the largest GDP producing block in the world, has said that it is changing the rules of the game big time. Any shorts of European debt on an uncovered basis will need to scramble to cover.

It is worthwhile reading this article in the Daily Telegraph for a run down on what happened. I don't think the market gets it yet but if they are caught short Greek, Spanish, Portuguese or any other European debt market they will need to buy these bonds to cover their naked short positions. This will spill over onto the EURUSD. Expect a big rally tonight.

Amongst those caught short the EUR across the board will be the systematic traders. Depending on how this rally unwinds there may be some pain in store for these CTA funds.

What happens with EURJPY will be very telling. If the rally in the EUR is strong enough to turn the USDJPY around then we are heading up a long way in the Euro across all crosses.

Position wise I'm long EURUSD.

Frank

The nine headed HYDRA

2010-05-19T12:39:00.000+10:00

Following the need for Europe, and the rest of the world, to rid themselves of the strangling tentacles of USD hegemony, German Chancellor Angela Merkel struck the first blow last night.

The bleating of market participants was loud and clear as per this quote from Bloomberg: “The market sees an inadequate policy such as this as an act of desperation and a refusal to address the fundamental problems at hand,”.

Guess what - the fundamental problems at hand are caused by market fundamentalism which "places unwarranted faith in the mythical self-correcting power of unregulated markets driven solely by the no-holds-barred, winner-takes-all self-interest of unruly market participants risking other people’s money for private profit." (C.K. Liu: Global Post-Crisis Economic Outlook - MUST READ).

This nine headed Hydra, under the guise of the Washington Consensus, has now been exposed and it is going to take a Herculean effort to exterminate by decapitating each of its nine heads, one by one.

A government, elected by its people to look after their interests, will not willingly subjugate this interest to some hotshot sitting behind a trading desk somewhere. The U.S. government of course is happy to do so but other governments, having been fooled once by the entrancing songs of globalisation, may not choose to feed another time from the poison cup of market fundamentalism.

The Europeans are probably sitting there wondering how did it come to this? We have some bonus hungry cowboy naked selling our debt and forcing us, a sovereign nation, to have to make our aged workers work longer years so that this guy can buy a new Porsche.

As with all catastrophes we go through the emotions of fear, anger, determination and hope. We had the fear in 2008, the anger just recently in Greece, the determination is now just starting to creep in in Europe first and soon to be followed by the hope of creating a world outside of the rapacious, greedy and essentially useless derivative laden financial construct that we have fallen into over the last thirty years.

This new world order will come about after the adoption (with or without the U.S.) of something like a World Outstanding Debt Cancellation Agreement (WODCA). This will be done in conjunction with the removal of the USD as the reserve currency and the establishment of genuine trade weighted currency valuations.

Derivatives will be gradually dismantled and banned. What purpose do they serve apart from providing a venue for a punt? Have you had a close look at what a synthetic CDO is? Can you believe that billions were laid on the line on the construct of someone's imagination and then paid for in full by the hapless U.S. tax payer when, of course, the bet went wrong.

As I have written over the last few days, the world outside of the U.S. has existed purely and simply to kowtow to the fiat USD. Merkel's move last night was the first head of the nine headed Hydra lopped off.

This may well be the bottom of the Euro because any resistance to the USD hegemony must provide support to other currencies.

I'm long EURUSD now.

Frank

Don't take your eyes off JPY...

2010-05-18T16:51:00.000+10:00

The Detma model trend Beta chart for USDJPY above shows that as the trend Beta descends to zero, the D6 model's signal has reversed from LONG to SHORT. As I have previously discussed regarding the JPY, the chart also shows a large number of spurious signals for the JPY over this period. The JPY has been the bane of systematic models over the last 14 months or so since it is the representation of the risk trade - risk on sell JPY, risk off buy JPY. As we have seen, the market has swung between these two views often since March 09.

The following chart shows the trend Beta from September 1995. The point I want to make is that all the "accidents" in the JPY tend to be on the upside, or downside for everything else versus the JPY. As a consequence I pay a lot more attention when Detma turns LONG JPY (SHORT) USD.

With all the excitement in Europe, the JPY has actually been quite stable. I wouldn't take my eyes of JPY right now however. If it follows through on the upside versus the USD, it will mean that the other JPY crosses such as EURJPY and AUDJPY will fall further.

Elsewhere, the Detma model is LONG USD virtually across the board. Since it systematically processes the price action to determine whether it buys or sells, the Detma model's positioning is a reflection of the market sentiment at any point in time.

In yesterday's post I discussed the rationale for USD strength in the face of huge twin deficits and its status of being the world's largest debtor nation. With this in mind, in the absence of concerted action to break this USD hegemony, the dollar will continue to suck in the world's wealth as the rest of the world struggles to find enough dollars to repay it debt.

Frank

USD hegemony is alive and well

2010-05-17T20:31:00.000+10:00

The price action over the last two days has been very favourable to the trend followers. The Detma ICP model trend betas are showing the price action as beginning to be on the extreme side for this cycle. This is reflected for all EUR pairs (apart from EURGBP) in the chart below.

As hard as it is to go against the current trend, there are many traders that feel strongly that the USD will fall as a consequence of the U.S. inflating themselves out of the ludicrous debt they are in. This will happen - the only question being when?

From the European point of view, and indeed from the point of view of all major economies the question must be: "how do we break free from the stranglehold that the USD has over our economies?" As Henry C. K. Liu so aptly points out, sovereigns outside of the U. S. should charge their exports in their own individual currencies. As things stand, the sole purpose of global trade is to raise dollars to pay back dollar denominated debt. The sole purpose of global trade is to produce goods to be swapped for U.S. Dollars printed by the Federal Reserve. Countries should not borrow their capital requirements externally in dollars, rather they should raise their required capital from government credits.

Currency values should revert to their previous purchasing power parity status (PPP). Their value, in respect to other currencies, should be a factor of a country's productivity and not merely a factor of how many dollars a country's central bank holds as reserves.

One thing that is now glaringly obvious to the world is that the USD no longer deserves the status of reserve currency. This will have to change whether the U.S. agrees or not. Perhaps then, the inevitable WODCA agreement I have spoken about before, should be part of a package that also replaces the USD as a reserve currency with some other internationally agreed to trade based model.

Position wise, after wrongly hitching my wagon to an effective ECB defense of the Euro, I have been playing defense with a straight bat the last couple of days. Right now I'm trying to balance USD strength caused by this existing and unreasonable USD hegemony with a view that the USD will be inflated out of existence at some stage. But from where is a bug bear.

Frank

Systems are fully loaded on the "risk off" side of the trade

2010-05-13T16:50:00.000+10:00

The systematic trend following models are all fully loaded up now for the deflationary risk off trade. The Detma output above shows that it is almost 100% long USD (except versus the NZD) and 100% long JPY versus AUD, GBP and EUR. D6 will turn long the JPY versus the USD if it closes below 92.73 at N.Y. close tonight.

Systematic models, by their very nature, need to follow the signals generated by their various algorithms. In the main, the only input into this automated decision making process is the market price action. This is a good and bad thing. It's a good thing because these models will identify a trend and stay on it until it expires and they will also identify this trend usually well before most other traders. The price they pay for this however is that they need to be invested all the time and as a consequence tend to get churned substantially when the market is chopping around.

In 2008 systematic CTA models demonstrated their extreme value by being the only profitable asset class and returning upwards of 30% for the year when all else was down similar to much greater amounts (I'm not including cash as an asset class here).

From around march 2009 it has been a different story for systematic programs since they have been mercilessly churned by the risk on/ risk off price action that has occurred. The big question now is since these models, as demonstrated by the Detma model, are loaded up on the risk off trade, are they going to get burnt again or are they ahead of the market as they can be.

The Australian dollar has been a good proxy for the risk on trade (or the carry trade) since March 2009. Over the period from then to today it has risen from around .6000 to .9400. There are many reasons to support the AUDUSD but it suffers quickly when the market is in the risk off mode. We saw evidence of this last Thursday as it was sold down from .9320 to .8700 in four days.

Since November 2009 the AUDUSD has been in a very broad .9400 to .8600 range. This range reflects the market's uncertainty in trying to determine whether it is all going to hold together or fall apart. At the extremes of this range is where you will find the systematic models, all loaded up and ready to go, but unfortunately they have been dragged back each time and sent the other way. So that is where we are again today. At the extreme lows of the EURUSD. Is there more in it and will we see another episode like 2008?

My "A simple message" post earlier today was tongue in cheek to a great extent but the overriding idea I have wanted to get across over the last couple of days is that if central banks don't take decisive action, it is all going to fall apart. The world financial system has not recovered from the GFC, it still needs years to do that. But if central banks don't step in and provide the stage for the global recovery that is required, then things are going to get nasty and 2008 will look like a mild blip in comparison.

So on that basis I'm assuming that things will hold together - until they don't. With that in mind, the EURUSD chart shows that we may have indeed made a low in the EURO. Whether it is heavily supported by central banks or not we may never know. But if it holds these lows I think the world will take a breather and at the very least we will see a bounce in the EURUSD to 1.4000 if not a lot higher.

Position wise, I was happy to wake up and see it down at 1.2620 again. That provided a good entry point based on my current thinking. So I'm long EURUSD and will cut if 1.2550 breaks.

Frank

A simple message....

2010-05-13T10:46:00.000+10:00

This morning Sydney saw similar price action in the EURUSD to yesterday. The late N.Y. session was, for whatever reason, testing the lows again at around 1.2610. Following the theme of the last couple of days' posts, I am still trading on the basis that the Euro package put forward over the week end was a last stand by the major central banks. On this basis 1.2600ish should hold the EURUSD. I have seen central banks do this before. If that is what they really want they will get it.

After testing and failing to breach the 1.2600 level yesterday morning Sydney time, the market had a natural reaction to the upside and drifted up towards 1.2650 into early Europe. When the German GDP numbers came out showing unexpected growth for Q1 2010, the market ramped the EURUSD up to 1.2740. It certainly did not like it up there. The market is still feeling cynical about the rescue package. The selling charge started from there and after pausing at around 1.2660 until N.Y. came in proceeding to charge towards the 1.2600 target.

If you imagine a troop of cavalry charging over the hill towards its target, it charged recklessly down to 1.2625 from which it took a slight breather and pulled back to 1.2650. From there it was on for young and old and the selling intensified - onwards my friends, 1.2600 is ours!

Just as the leaders were approaching the death charge from 1.2630 and quickly approaching 1.2610 a simple sign was noticed right in front of the 1.2600 barrier. The writing was quite small, but somehow by its very minimalist appearance, conveyed a semblance of power. The leading troops had to be virtually on top of it to read the sign - they reigned in their selling and and with fire in their eyes they read the simple message "YOU WILL NOT PASS".

The rest of the story you can make up for yourself but suffice to say we are on this side of 1.2600. The bubble will burst for me if we break below 1.2550 - no questions asked.

Frank

Ding! ding! ding! - is that a bell I hear?

2010-05-12T12:21:00.000+10:00

The Sydney time-zone, as a currency trading zone, has its pluses and minuses. Usually it is a grind as overnight orders tend to sit on either side of a tight range and nothing really happens. At other times, especially on Monday mornings after an eventful weekend overseas, because Sydney is the first major center (with apologies to our N.Z. friends) to open, it is extremely busy and the volumes can be huge.

The Sydney time-zone opens at around 4 pm N.Y. This is so it can mop up the end of N.Y. trading activity and accept their orders for the Asian time-zone. It is because it overlaps the N.Y. end of day that the Sydney time-zone can also be the marker for a turning point in the markets. I have seen it on many occasions over the last 40 years or so. Sydney acts as the "night watchman" for overseas central bank orders. When these central banks come in they act more aggressively in their own time-zones and away we go.

I still have my imagination cap on this morning and this is what I see. The world's major central banks put out a monster of a package over the weekend past. And they waited for the market to digest it. Monday was positive but on Tuesday the rampant cynicism which pervades the markets at the moment (rightly so) took hold and Monday's gains in the EURUSD were almost wiped out entirely. The EURUSD was sold consistently throughout the day, terminating with the N.Y close of around 1.2620. Now that is pretty close to 1.2600 which is only 100 points away from the 1.2500 panic sell off last Thursday. It was that sell off, not just in currencies but in all asset markets, that spurred the strong actions of the weekend.

Now if I were a central bank, I would surmise that if the EURUSD were to break below 1.2500 that the subsequent selling would be too strong to stop much before say 1.2000. And if I wanted to defend 1.2500 I wouldn't wait until it got there. I would start buying at least at 1.2600. So my line in the sand is 1.2600. Fanciful? Perhaps but it's worth a try because if they do hold it then the EURUSD is going to go up very quickly due to the market being so short. If that happens then yes, ding!ding!ding! the bell rang this morning for the low in the EURO.

The main problem with this story is that the ECB is not the Bundesbank, and the Fed today is not the Fed under Volcker. Anyway it will be interesting to see if we hold 1.2600 in our time-zone. If so expect a big kick up overnight.

The EURUSD chart shown above would suggest that if 1.2600 holds, that the move down from 1.3100 to 1.2600 was a failed fifth wave for a culmination of the fall from 1.5150 last November. The subsequent rally will push up towards 1.6000 and beyond.

The AUDUSD is marking time, waiting to see what happens with the EURO. Essentially, the budget handed down by the Australian Treasurer, Wayne Swan, was well received. One cannot deny that Australia has got very attractive fiscal numbers at the moment. In a world where people are focusing on public debt, with a budget deficit at 4.4% of GDP Australia is in a sweet spot right now.

The AUDUSD chart shows the resistance at .93/.9400. This cleansing of long positions maybe what it needed to mount a successful campaign at that level. I'm long AUDUSD now but will cut it if the EURUSD breaks below 1.2580.

The Detma model is mixed at the moment. The price action has put it long USD against everything. That's the deflationary risk off trade which is what has been happening over the last couple of weeks. As I wrote above, if the central banks have stopped that then systematic models will wear a great deal of pain as they swing around the other way.

Frank

"YOU WILL NOT PASS!"

2010-05-11T19:29:00.002+10:00

Today's post is about imagination. Imagine if central banks actually get it right and manage to pull this one off? Their actions in maintaining low interest rates and pumping loads of liquidity into the global financial system manage to hold it all together and guess what, that light at the end of the tunnel is not an oncoming train after all! It's daylight.

This is a good time to play the imagine game because it is an inflection point in the currency and credit markets. Over the weekend world central banks seem to have drawn the a line in the sand and said "YOU WILL NOT PASS!". In other words the Eurozone will hold together and the Euro will not disappear.

I was a spot Aussie trader for Barclays in Sydney in 1985 when the Plaza Accord was agreed to by the G7. The market had taken the central banks on for weeks before hand in continuing to buy the USD in the face of warnings by them that it was too high. Most traders that were around then will still remember that when they came in they were deadly serious.

How this most recent intervention by the G7 translates into JPY weakness and AUD strength is not clear at the moment but I have learnt over the years to act on the charts first and worry about the reasons why later. So if we are talking about big decision points then we should look at the longer term charts. The quarterly charts above for USDJPY and AUDUSD both have almost identical EWT long term counts. In both instances the Dec 2008 lows may have been the end of B waves with large cycle degree C waves to the upside now forming. The question again is how do we justify these moves? It certainly implies that Japan's deflationary cycle comes to an end. It also implies a massive success for the carry trade.

The long term USDCHF chart also shows considerable bunching up around parity to the USD by the CHF. Why the USD will be so strong is not easy to see at the moment. If anything the feeling is that the U.S. will inflate itself out of this mess and that equates to a weak USD.

The carry trade will more likely succeed in an inflationary environment but why the JPY and the CHF will weaken so much against the USD is not yet clear.

If anything is is the deflationary scenario (the risk off trade) that implies a strong USD - but that does not reconcile with a weak JPY and strong AUD.

This is why imagination is so important in trading. As I was demonstrating above it is hard, based on current available information, to justify the carry trade shooting up to the upside in a huge way. The trader can however imagine that it is going to happen and probe that side of the trade. If it sticks one can then pile on the risk in that direction. If it doesn't stick then it is a train coming after all.

Systematic trend following models like Detma are too short term to be looking at such a big picture. They have no imagination - that is the basis for them - to take out all human elements from the decision making process. They will get onto a trend though, and stick to it like glue. Sadly they can also get chopped when the market is listless and caving in on itself. This has been happening over the last twelve months or so with the risk on/ risk off trade. The carry trade has been a real crying game for the models and it seems like it is doing it again. Detma is now 100% short EURJPY and GBPJPY. D6 will sell USDJPY if tonight's NY close is at 92.55 or lower. All of this just before the carry trade comes back on again?

I'm looking to buy AUDUSD for now. The Australian Treasurer will be bringing down the Budget tonight at 7.30 pm Sydney time. I'll wait to see how that plays and perhaps get in slightly lower down.

Frank

The Keystone Kops need a WODCA...

2010-05-10T14:49:00.004+10:00

The Detma model output for 6 & 7 May are posted above. Recent strength by the USD and JPY, as a consequence of selling the carry trade, have caused the model to short AUD and CAD versus the USD (D12) and AUD and GBP versus the JPY (D6).

Detma was designed as a daily close model. The risk management and money management platforms were constructed to be able to withstand a 30 standard deviation hit on daily close to close basis. That is, based on historic correlations and volatilities of the portfolio dating from 1983, any one day's move against the portfolio would have to deviate from the average return of the portfolio by 30 standard deviations to trigger the worst drawdown scenario.

This gearing setting gave me the confidence to not worry about the intraday shenanigans that occur in markets from time to time. However once equity grows to a large enough level it is not feasible to rely on at close entry/ exit points alone. That is why the big systematic players developed 24 hour trading desks - to be able to feed the fund's liquidity into and out of the market with the smallest footprint possible.

I don't believe that 24 hour desks were developed to improve performance as such, just to allow a more efficient management of the fund's liquidity. Having said that however, it does open the fund up to extraordinary intraday movements. The impact of these will more than likely be on the negative side. Just imagine gradually adding to a position as a market is falling, or being triggered into a short at an extreme level for the day, and then having to scramble back the other way a short time later if the market is reversing strongly.

These moves normally occur in minimal liquidity situations so the fund's slippage between the signal point and the fill will be great. All of this suggests that systematic funds that were forced to trade during last Thursday's horror 30 minutes in N.Y. would have been hurt. Funds that trade intraday breakouts would have been hurt severely as well. It will be interesting to see the performance numbers that come out at the end of May.

Anyway what's next? The price action on Thursday was a clarion call. It seems that the Eurozone is answering that call with a USD 1 trillion debt package to be used to bail out Eurozone countries as and when needed. This may be a response to the sovereign debt issues in Europe but it is the wrong response. If one considers for a moment the ludicrousness of the current global financial situation, if it wasn't so alarmingly serious it would be Keystone Koppishly laughable.

Remember what happened in 2007 and 2008? The world's banking and shadow banking industry had bankrupted itself in a massively geared bet on U.S. housing that went wrong. So along come the Keystone Kops, in the guise of the world's central banks, with absolute bucket fulls of newly printed cash to either bail these greedy guys out directly or indirectly by buying the crap that they couldn't offload to any one else.

Now these greedy guys, who by the way couldn't believe their luck, with a wink and a nod just barely managed to stop from laughing long enough to quickly lash out with some meaty bonuses for themselves. They were, and are, able to justify this because they can borrow from central banks at zero to one percent, and then lend it back to the same government that is funding their rescue at four to, well now in the case of Greece, nine plus percent. Not only that, they can also take this zero percent money, gear it up twenty or thirty times and sell Credit Default Swaps on sovereigns that will allow this to happen.

Can you believe it? They can do this knowing full well that if they get it wrong they will be bailed out by the same governments they are screwing. What a lurk. It seems that this fake capitalism (profits)/ socialism (losses) has run out of normal every day suckers to bleed and is now up to the sovereigns. Let's start with the small ones first, like Greece etc and as we destroy them let's make our way up the food chain to the big Kahuna of them all, the U.S.

You can't fix a bad debt situation by borrowing more money - sorry it's a fact. So this USD 1 trillion the ECB is putting up is going to be burnt. We don't even need to talk about the trillions that Uncle Sam has greased into the system - nor the U.K.

In another masterful piece put out today by Dr Frank Shostak, he explains that all of this growth you are seeing coming out of the U.S. at the moment comes directly from the Fed:

All of this is going to lead to a great unwinding. A collective re-scheduling or cancellation of sovereign debts under a Bretton Woods style of agreement. My suggestion - the World Outstanding Debt Cancellation Agreement or WODCA. It is going to be very painful but somehow I just suspect that 0.1% of the world's population cannot continue to feed on the other 99.9% of the world's population forever.

In the midst of all of this the Australian Government has cottoned onto the fact that the big miners are getting away with it. Yes BHP, RIO and the other hangers on have been giving it to China big time in the form of huge price rises for the minerals they dig out of Australian soil. Why have they been able to do this, well because they can. China will pay anything at the moment for the stuff they need to build their infrastructure needs. So the Australian Government figures if they can do it we can do it and says to the miners "hey guys, you're the hot team in town, we have just bailed your other corporate mates so cough up with some more dough!"

Position wise I have been square the AUDUSD since .9050 last Thursday Sydney time. At the time of writing this it is trading at .9035 so it looks like I haven't missed much but of course in between many fortunes have been made and lost. From here I'm waiting for Europe to come in and maybe I'll wait another day or two to see how this new pile of debt affects the markets.

I think I need to chill anyway.

Frank

One for the Gipper....

2010-05-06T18:43:00.003+10:00

The Detma D6 shorter term model sold AUDUSD at the N.Y. close this morning. This leaves Detma 30% long AUDUSD. The market is challenging the recent risk on mode by selling the carry trade versus the USD and JPY. It is still not dangerously under threat with the Detma model still short JPY against the USD, GBP and AUD and the reversals some distance away.

The repercussions of the fiscal uncertainty engulfing Greece, and potentially Portugal and Spain, were felt across currency, stock, credit and commodities markets overnight. This reaction was on the cards and the simple solution is to let Greece ease out of the Euro and the Eurozone - but stay as a member of the European Union. There are 11 countries, including Denmark, Sweden and the United Kingdom, that are members of the European Union but not in the Eurozone.

Throwing more good money after bad can't be the answer. Let the banks take the hit and get on with life. Once the pain is taken that will be it and the Euro will be better of without Greece anyway. If that happens buy the Euro with your ears pinned back because the market is extremely short and the USD is much too strong.

The AUD looks like it has broken long term support. Depending on how things pan out in Europe, we may well see the AUDUSD foundering along in the low .8000's. The lows of .8600 earlier this year should be well and truly tested. Having said that I'm on the sidelines here at .9050. It's been a tumultuous ride down to here and I want to see if the AUDUSD breaks below .9000 and stays there before I get back in.

I guess the question being nervously asked is whether we are now exiting the eye of the storm and entering the cataclysm of the end game for the global economic system that we know and cherish.

I hope not and being an eternal optimist (I am really) I don't see it happening. What has to happen is that the powers that be need to come to the realisation that if they let the banks play unsupervised, then they will get into trouble every time and come home crying. Then they have to be fed and cleaned up and sent out to play again. Maybe they should be grounded for say, 30 years or so whilst they make up for their sins?

I think the Australian Prime Minister, Kevin Rudd, is onto a real election winner with this super resources tax. The sight of these suited up, highly paid mining executives pouting and stomping their feet is not going to cut any mustard in the current world environment. Let me see, moral hazard, multi billion dollar bonuses, greed and corruption, trillion dollar bail outs and the socialisation of losses and the privatisation of profits has been bombarding the working class person for too long. That was one for the Gipper Kevin.

Frank