So?...

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