InvestMacro FX

Norway appears to be an active market player for the forex world lately. With a recent discovery of a sizeable oil well in the northern Norwegian Sea, the price of the black gold remains a serious factor for the NOK. As the USD gains strength from recent risk aversion, the price of Crude Oil has entered a slump which has weighed heavily on Norway’s economy, but the discovery will no doubt help future development and growth for their market share.

Also adversely affecting the NOK’s value is the recent decrease in Norway’s interest rates to 1.25%, a move which was expected by most market analysts, but carries the expectant impact of weakening the currency that was needed to help boost exports.

In Sweden, the Riksbank announced on June 10th that it will borrow up to 3 billion EUR to shore up its financial backing. This comes as no surprise since many banks are still under threat of losing substantial capital from the prospect of Latvia devaluing its currency, the Lat, due to the recent crisis in the Baltic States.

Since many of Sweden’s banks receive the bulk of their funding in foreign currencies, the banks will need to sufficiently back up their foreign reserves. This EUR-borrowing operation is intended to assist in this backing, but works as a way of devaluing the SEK, which many forex traders can now see quite clearly.

USD/SEK 1-Hour Chart

• The above chart is the USD/SEK hourly chart by ForexYard.

• The indicators used are the Bollinger Bands, RSI, and MACD.

• Point 1: The price has just entered the over-bought territory on the RSI, signaling a downward movement may be in the making.

• Point 2: The MACD shows multiple bearish crosses which support the notion of a downward movement.

• Point 3: The Bollinger Bands on the chart appear to be tightening as foreshadowing of an impending sharp, volatile movement.

• Conclusion: This pair is either going to experience a downward movement before a volatile jump (direction is unclear for the jump), or the jump is going to be downward if the value of the USD takes a hit today. Either way, a downward movement is imminent; the size of that move is what is undetermined at this point.

This article is part of a syndicated series about deflation from market analyst Robert Prechter, the world’s foremost expert on and proponent of the deflationary scenario. For more on deflation and how you can survive it, download Prechter’s FREE 60-page Deflation Survival Guide now.

The following article was adapted from Robert Prechter’s 2002 New York Times, Wall Street Journal and Amazon best-seller, Conquer the Crash – You Can Survive and Prosper in a Deflationary Depression.

By Robert Prechter, CMT

Seventy years of nearly continuous inflation have made most people utterly confident of its permanence. If the majority of economists have any monetary fear at all, it is fear of inflation, which is the opposite of deflation.

As for the very idea of deflation, one economist a few years ago told a national newspaper that deflation had a “1 in 10,000” chance of occurring. The Chairman of Carnegie Mellon’s business school calls the notion of deflation “utter nonsense.” A professor of economics at Pepperdine University states flatly, “Rising stock prices will inevitably lead to rising prices in the rest of the economy.” The publication of an economic think-tank insists, “Anyone who asserts that deflation is imminent or already underway ignores the rationale for fiat currency — that is, to facilitate the manipulation of economic activity.” A financial writer explains, “Deflation…is totally a function of the Federal Reserve’s management of monetary policy. It has nothing to do with the business cycle, productivity, taxes, booms and busts or anything else.” Concurring, an adviser writes in a national magazine, “U.S. deflation would be simple to stop today. The Federal Reserve could just print more money, ending the price slide in its tracks.” Yet another sneers, “Get real,” and likens anyone concerned about deflation to “small children.” One maverick economist whose model accommodates deflation and who actually expects a period of deflation is nevertheless convinced that it will be a “good deflation” and “nothing to fear.” On financial television, another analyst (who apparently defines deflation as falling prices) quips, “Don’t worry about deflation. All it does is pad profits.” A banker calls any episode of falling oil prices “a positive catalyst [that] will put more money in consumers’ pockets. It will benefit companies that are powered by energy and oil, and it will benefit the overall economy.” Others excitedly welcome recently falling commodity prices as an economic stimulus “equivalent to a massive tax cut.” A national business magazine guarantees, “That’s not deflation ahead, just slower inflation. Put your deflation worries away.” The senior economist with Deutsche Bank in New York estimates, “The chance of deflation is at most one in 50” (apparently up from the 1 in 10,000 of a couple of years ago). The President of the San Francisco Fed says, “The idea that we are launching into a prolonged period of declining prices I don’t think has substance.” A former government economist jokes that deflation is “57th on my list of worries, right after the 56th — fear of being eaten by piranhas.” These comments about deflation represent entrenched professional opinion.

As you can see, anyone challenging virtually the entire army of financial and economic thinkers, from academic to professional, from liberal to conservative, from Keynesian socialist to Objectivist free-market, from Monetarist technocratic even to many vocal proponents of the Austrian school, must respond to their belief that inflation is virtually inevitable and deflation impossible.

……….

For more on deflation, download Prechter’s FREE 60-page Deflation Survival Guide or browse various deflation topics like those below at www.elliottwave.com/deflation.

• Is deflation a precursor to depression?
• The case for deflation
• US deflation risk
• Can the Fed stop deflation?
• And much more in Prechter’s FREE Deflation Survival Guide.

By Fast Brokers – The collision between our 2nd tier trend lines is approaching today, indicating volatility could increase over the next few trading sessions.  Looking off towards the Dollar’s correlations, we notice gold made another decisive move south today once reaching an inflection point of its own.  Meanwhile, crude and the S&P futures are flirting with important trend lines.  We believe the Dollar could take its cue from gold and exercise their negative correlation, implying a decline in the EUR/USD.  As we mentioned in our previous analysis, the Dollar is at a T-Junction with the Euro, meaning we should see a trend statement soon.  That being said, the mentality seems to be shifting across the board.  From overbought equities to international tensions to expensive crude, the momentum appears to be shifting to the downside.  Markets were relatively quiet last week while patterns consolidated, reflecting investor indecisiveness.  However, it seems the FX markets could awaken as trend lines reach their respective inflection points.

If the EUR/USD should decide to make a game-changing move to the south as we anticipate, the currency pair could experience a swift pullback towards our 1st tier uptrend line and the 1.35-1.36 zone.  We can’t forget the EUR/USD previously broke below the neckline (3rd tier uptrend line) of our head and shoulders patter and the retest seems to have failed.  Large volume sessions have been dominated by the sell-side and volume is on the decline again.  Hence, investors should keep a close eye out for any large action to the downside, particularly any with the currency pair trading near June lows.  As for the upside, investors should look for a pop above 1.40 and our 3rd tier downtrend line on large volume before feeling comfortable.

The Euro continues to exhibit relative weakness with the EUR/GBP breaking below some important uptrend lines.  The weakness in the Euro comes despite a slightly better than expected German Ifo Business Climate number.  The data point remains well beneath 2007 highs, signifying it’s still too early to tell whether we’re experiencing a head-fake via improvement in economic data, or whether we’re witnessing a true technical bottom.  Therefore, despite the positivity inherent in today’s release, the EU region remains in a comparatively mixed state regarding its economic condition.  The headlines will remain relatively quiet on the economic data news front until the EU releases a slew of manufacturing and services PMI data points on Tuesday.  We maintain our negative outlook trend-wise for the near-term due to the aforementioned analysis.  However, we keep in mind that there is a medium-term uptrend in play, and it will take several fundamental movements to the downside to alter the currency pair’s ultimate path upward.

Present Price: 1.3855

Resistances: 1.3894, 1.3954, 1.4019, 1.4052, 1.4112

Supports: 1.3847, 1.3807, 1.3759, 1.3724, 1.3668

Psychological: 1.40, 1.35

Market Commentary provided by Fast Brokers.

Disclaimer: FastBrokers’ market commentary is provided for information purposes only and under no circumstances should be regardedneither as an investment advice nor as a solicitation or an offer to sell/buy any financial product. FastBrokers assumes no responsibility or liability from gains or losses incurred by the information herein contained.

Risk Disclosure: There is a substantial risk of loss in trading futures and foreign exchange. Please carefully review all risk disclosure documents before opening an account as these financial instruments are not appropriate for all investors.

By Fast Brokers – The Cable is giving into our 3rd tier downtrend line after last week’s push was blocked by our trend line and the psychological 1.65 level on declining volume.  Despite the GBP/USD’s willingness to head higher, the currency pair is giving into its positive correlation with gold and U.S. equities.  Market sentiment is turning sour due to a combination of international tension (Iran/N.Korea) and the World Bank reducing its outlook for global economic growth from -1.7% to -2.9%.  The possibility remains that present market stability is not a true bottom since we have not seen a complete recovery in economic data globally.  The Cable is also dealing with a struggling Euro as the EU currency depreciates strongly across the board.  Meanwhile, the Pound maintains its relative strength due to the fact that Britain’s economic data has been the most encouraging globally next to China’s.  The Cable continues to be resilient after last week’s CCC number reiterated the encouraging improvement taking place in Britain’s employment market.  Regardless, U.S. equities are treading water and the Cable’s positive correlation with the S&P should shine through at the end of the day.

Speaking of the S&P, the indicie’s futures are doing what they can to avoid a retest of the highly psychological 900 level.  Any significant pullback in the S&P futures would likely result in a corresponding downturn in the Cable.  In other correlation developments, gold has made an aggressive move to the downside after a period of tight consolidation.  Gold has had a negative correlation with the Dollar, implying the greenback could experience a swift appreciation soon.  The Cable’s inability to tackle previous June highs and the psychological 1.65 level is certainly discouraging.  We’ve noticed some interesting volume to the downside while volume tailed off during important moments of resistance.  Hence, we believe near-term momentum remains to the downside in the GBP/USD.  Fortunately for the bulls, the currency pair has constructed some nice supports along the way due to the Pound’s comparative strength globally.  Therefore, should the Cable head south, the currency pair has close defenses at our 3rd tier uptrend line and June 18 lows.  As for the upside, the key for the GBP/USD will be clearing our 3rd tier downtrend line and previous June highs on rising volume.   Should this happen, we could witness a nice near-term run.

Present Price: 1.6434

Resistances: 1.6498, 1.6574, 1.6624, 1.6712, 1.6851

Supports: 1.6412, 1.6371, 1.6315 1.6210, 1.6141

Psychological: 1.65, 1.60

Market Commentary provided by Fast Brokers.

Disclaimer: FastBrokers’ market commentary is provided for information purposes only and under no circumstances should be regardedneither as an investment advice nor as a solicitation or an offer to sell/buy any financial product. FastBrokers assumes no responsibility or liability from gains or losses incurred by the information herein contained.

Risk Disclosure: There is a substantial risk of loss in trading futures and foreign exchange. Please carefully review all risk disclosure documents before opening an account as these financial instruments are not appropriate for all investors.

By Fast Brokers – The USD/JPY has recovered nicely along our 2nd tier uptrend line while experiencing declining volume to the downside, both encouraging developments for the uptrend.  However, the currency pair still feels the pressure from its medium-term downtrend, and is being squeezed between our 2nd tier uptrend and downtrend lines.  Meanwhile, the USD/JPY’s positive correlations are under selling pressure as it seems U.S. equities could be in for a pullback.  The Dollar is appreciating across the board, and there is no reason to believe the USD/JPY wouldn’t participate.  Investors are heading for safety with uncertainty creeping back into the market place concerning the sustainability of the global economic recovery.

Today’s economic data from Japan showed a large improvement in business conditions and outlook.  It seems Japan’s economy could finally be finding a bottom with manufacturers and exports adjusting to the concept of a weaker global aggregate demand.  Coincidentally, the positive numbers from Japan are adding to the downward momentum in the USD/JPY.  The central banks of both the U.S. and Japan have their benchmark rates hovering just above zero while the nations participate in their respective alternative liquidity measures.  Hence, any positive data from Japan combined with negative data from the U.S. results in an appreciation of the Yen against the Dollar.  Regardless, the currency pair is hanging onto our 2nd tier uptrend line, and it will be interesting to see how it react reacts to the inflection point approaching.  If the 2nd tier uptrend line fails, there’s quite a ways down to our 1st tier uptrend line.  Investors will be keeping a close eye on the S&P futures and how the futures deal with a retest of 900 should it occur.  We maintain our negative outlook on the USD/JPY trend-wise.

Present Price: 96.00

Resistances: 96.33, 96.90, 97.45, 97.58, 98.66

Supports: 95.82, 95.20, 94.45, 93.76, 93.32

Psychological: 95, 100

Market Commentary provided by Fast Brokers.

Disclaimer: FastBrokers’ market commentary is provided for information purposes only and under no circumstances should be regardedneither as an investment advice nor as a solicitation or an offer to sell/buy any financial product. FastBrokers assumes no responsibility or liability from gains or losses incurred by the information herein contained.

Risk Disclosure: There is a substantial risk of loss in trading futures and foreign exchange. Please carefully review all risk disclosure documents before opening an account as these financial instruments are not appropriate for all investors.

Wednesday June 24 – US Fed Reserve Announcement @ 2:15 pm EST. Expect statement on Fed’s Quantitative Easing Program. No expected change to short term interest rates.

Thursday June 25 – US 1st Quarter Gross Dommestic Product statistics released @ 8:30 AM EST. We have seen the Estimated and Revised data….now we see the Actual. Any change from the Revised figure (a 5.7% decline in 1st Qtr US GDP) could move the markets.

Friday June 26 – US Personal Income and Outlays @ 8:30 am EST. This used to be a sleepy data release that only economists watched. But there is an increasingly large group of market participants that believe that US consumers are changing their spending habits very aggressively and this could factor into future growth (or lack of growth).

Friday June 26 – US Consumer Sentiment 9:55am EST. This ties into Friday’s 8:30 data release. Is there a disconnect between what consumers are doing and what they are saying?

By: Stephen Leahy – Back Bay FX

Source: ForexYard

After depreciating consistently over the past month, the USD is now traded over 1.39 against the EUR, and over 1.64 against the GBP. This week on Wednesday, the Federal Reserve is expected to deliver an Interest Rates statement, and is widely expected to leave it on 0.25%. However, any change that might take place is prone to sow disorder in the market, and forex traders should be ready for it.

Economic News

USD – Dollar to Go Bullish on Weak Equity Market

The encouraging homes sales and manufacturing figures from the U.S. last Thursday helped boost confidence in the USD against the EUR. However, the bearish equity markets drove the USD higher last Friday. The GBP/USD began Friday’s trading at 1.6337, whereas now the pair is trading at the 1.6472 level. Additionally, the EUR/USD pair was trading as high as the 1.4000 on Friday, and it now trades at the 1.3915 level. This behavior signals some of the high volatility that the forex market has been experiencing recently.

Last Thursday’s poor unemployment figures and the first weekly U.S. equity market loss in a month are likely to play a key role in U.S. trading today and for the week ahead. Traders are advised to follow news surrounding President Obama’s economic reforms as well. Furthermore, traders should pay attention to economic news coming out of the Euro-Zone and Britain, as these factors will help determine the USD’s strength against its major currency crosses.

When looking ahead to this week, we can say that there is plenty of economic data that will affect the USD. This includes Existing Home Sales, the FOMC’s statement, the Federal Funds Rate, and Unemployment Claims. Additionally, the Dollar may go bullish if the equity market continues to fall rapidly, due to traders possibly flocking to the USD as a safe-haven. Furthermore, on Thursday U.S. Final GDP figures at 12:30 GMT are likely to play in the mind of traders’ confidence in the Dollar later on this week.

EUR – EUR Weighed Down By Euro-Zone Banking Woes

Despite the EUR/USD rate reaching as high as 1.3982 last week, it now stands at 1.3910. This comes about as the U.S. economy is currently healthier than Europe. The British economy has also been fairing well, as the EUR/GBP rate opened at 0.8536 last Thursday. However, it now stands at 0.8445, indicating a loss in confidence for the EUR since the commencement of Thursday’s trading.

As the U.S. economy leads the world in rising out of recession, the Euro-Zone isn’t so far away. Nevertheless, they have a banking system which needs radical U.S.-style reforms. This was one of the main reasons for the unstable and at times weak EUR in last week’s trading. This came about in response to the European Central Bank (ECB) warning that banks in the Euro-Zone may face up to $300 billion of losses by the end of 2010.

Analysts foresee a possible EUR sell-off for the beginning of the week. However, this process could reverse as the week goes by. Today, there is some important news coming out of the Euro-Zone. This includes the German Ifo Business Climate data at 8:00 GMT and ECB President Jean-Claude Trichet’s speech at 12:00 GMT. There is also much data coming out of the Euro-Zone throughout the days ahead. Therefore, the EUR will likely be a key player in the forex market this week.

JPY – Yen to Dominate Forex Trading This Week!

As Japan’s economy is expected to rise out of the recession faster than many analysts anticipated, we have seen some renewed strength last week for the JPY, especially vs. the USD. The reasons for this behavior are varied. However, mixed economic data releases from the U.S. does play a role in this, such as weak unemployment and inflation figures for the U.S. economy. The USD/JPY rate was as high as 97.76 last week, and is currently trading lower at 95.97

Due to the important data coming out of Japan’s economy in the days ahead, there is the potential for great volatility in the JPY. A number of figures, including the CSPI report, Japanese trade balance, Tokyo Core CPI, and All Industries Activity data are to be published this week. These will assist forex traders in getting a feel of what health the Japanese economy is in. It is reasonable to say that the JPY will have a key role in dominating forex trading this week.

Crude Oil – Crude Oil to Hit $75 a Barrel?

Crude Oil managed to hold above $70 a barrel for most of last week. This was owed to a variety of factors, such as China and Japan’s economies improving faster than originally forecast. In fact, Crude prices reached a near-9-month high last week at just over $73.20 a barrel. This was despite fears that demand for the black gold was dissipating. Top U.S. banks, such as Goldman Sachs, upgraded their forecasts for Crude Oil. They are beginning to anticipate black gold hitting $85 a barrel by year’s end.

There were, however, arguments from the other side, implicating that demand would be unable to keep up with the current price of Crude. However, since the latter half of last week, the former argument has had more strength. Trading on Friday did see Oil drop by nearly $2 a barrel to near the $70 mark, possibly owing to the bullish USD at the end of trading last Friday. If the U.S. continues to publish predominantly positive economic news, it isn’t far off to say that we may see Crude hit $75 relatively soon.

Technical News

EUR/USD

The daily chart is showing mixed signals with its RSI fluctuating in the neutral territory. However, the hourly chart’s RSI is already floating in the over-sold territory, suggesting an upward correction may be imminent. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.

GBP/USD

The typical range-trading on the hourly chart continues. The price is floating in the neutral territory on the 4-hour chart’s RSI. However, the pair currently sits near the upper border of the daily chart’s RSI, suggesting a downward correction may be imminent. When the downwards breach occurs, going short with tight stops appears to be preferable strategy.

USD/JPY

The hourly chart is showing mixed signals with its Slow Stochastic fluctuating in the neutral territory. On the other hand, the bullish cross forming on the 4-hour chart’s Slow Stochastic implies that an upwards correction might take place in the nearest time frame. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.

USD/CHF

The pair has been range-trading for a while now, with no specific direction. The daily chart’s Slow Stochastic is providing us with mixed signals. The 4-hour chart’s indicators do not provide a clear direction as well. Waiting for a clearer sign on the hourlies chart might be a good strategy today.

The Wild Card – Crude Oil

Oil prices dropped significantly last week and peaked at 69.50 per barrel. However, a bullish cross forming on the 4-hour chart’s Slow Stochastic implies that an upwards correction might take place in the nearest time frame. This might be a good opportunity for forex traders to enter the trend at a very early stage.

Forex Market Analysis provided by Forex Yard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

By CountingPips.com

Canadian Retail Sales decreased in April after three straight monthly increases according to the monthly report released by Statistics Canada today. Retail sales decreased by 0.8 percent to C$33.5 billion in April following an increase of 0.3 percent in March.  The fall in Retail sales was more than expected as economic forecasts were predicting a 0.1 percent increase for the month.

Core retail sales, excluding automobile sales, fell by 0.5 percent in April following a decline of 0.3 percent in March. The decline in core sales also surpassed forecasts expecting a 0.1 percent decline.

Contributing to the slide in the retail sales numbers was a decrease in the automotive sector by 1.9 percent.  Within that sector gasoline station sales fell by 1.9 percent for the month while new car dealers sales declined by 1.8 percent.  The food and beverages stores sector saw a 1.0 percent decline while furniture, home furnishings & electronic stores fell by 0.8 percent and clothing & accessories stores decreased by 0.6 percent. Positively contributing to the monthly retail sales were increases in miscellaneous retailers stores, general merchandise stores and in building & outdoor home supplies stores.

Canadian Loonie falls in Currency Trading.

The Canadian loonie dollar has been weaker today in the currency markets versus the major currencies after the lower retail sales data. The Canadian currency has decreased versus the euro, British pound, Japanese yen, U.S. dollar, Australian dollar and New Zealand dollar.

The U.S. dollar has advanced today against the Canadian loonie as the USD/CAD pair trades at the 1.1343 in the afternoon of the US session at 3:09pm EST. The USD/CAD opened the day trading at 1.1316 at 00:00GMT according to currency data by Oanda.

The euro has increased against the loonie as the EUR/CAD trades at the 1.5828 level after opening the day at 1.5751. The loonie has declined versus the Japanese yen as the CAD/JPY trades at the rate of 84.78 yen per loonie level after opening the day at 85.35.

The British pound has jumped versus the loonie today as the GBP/CAD trades at the 1.8724 level after opening the day at 1.8488.

The Australian and New Zealand dollars have also gained ground today versus the Canadian currency as the AUD/CAD trades at 0.9140 after opening at 0.9058 while the NZD/CAD trades at 0.7301 after opening the day at 0.7231.

GBP/CAD Chart – The British Pound gaining versus the Canadian Dollar today in Currency Trading and reaching the highest exchange rate since December.

The following is excerpted from Robert Prechter’s Independent Investor eBook. The 75-page eBook is a compilation of some of the New York Times bestselling author’s writings that challenge conventional financial market assumptions. Visit Elliott Wave International to download the eBook, free.

By Robert Prechter, CMT

…The natural tendency of people to apply physics to finance explains why successful traders are so rare and why they are so immensely rewarded for their skills. There is no such thing as a “born trader” because people are born — or learn very early — to respect the laws of physics. This respect is so strong that they apply these laws even in inappropriate situations. Most people who follow the market closely act as if the market is a physical force aimed at their heads. Buying during rallies and selling during declines is akin to ducking when a rock is hurtling toward you.

Successful traders learn to do something that almost no one else can do. They sell near the emotional extreme of a rally and buy near the emotional extreme of a decline. The mental discipline that a successful trader shows in buying low and selling high is akin to that of a person who sees a rock thrown at his head and refuses to duck. He thinks, I’m betting that the rock will veer away at the last moment, of its own accord. In this endeavor, he must ignore the laws of physics to which his mind naturally defaults. In the physical world, this would be insane behavior; in finance, it makes him rich.

Unfortunately, sometimes the rock does not veer. It hits the trader in the head. All he has to rely upon is percentages. He knows from long study that most of the time, the rock coming at him will veer away, but he also must take the consequences when it doesn’t. The emotional fortitude required to stand in the way of a hurtling stone when you might get hurt is immense, and few people possess it. It is, of course, a great paradox that people who can’t perform this feat get hurt over and over in financial markets and endure a serious stoning, sometimes to death. Many great truths about life are paradoxical, and so is this one.

This article is part of a syndicated series about deflation from market analyst Robert Prechter, the world’s foremost expert on and proponent of the deflationary scenario. For more on deflation and how you can survive it, download Prechter’s FREE 60-page Deflation Survival eBook, part of Prechter’s NEW Deflation Survival Guide.

The following article was adapted from Robert Prechter’s NEW Deflation Survival eBook, a 60-page compilation of Prechter’s most important teachings and warnings about deflation.

By Robert Prechter, CMT

Myth 1: “War Will Bail Out the Economy”

Many people argue that war will bring both inflation and economic boom. Wars have not been fought in order to inflate money supplies. You might recall that Germany went utterly broke in 1923 via hyperinflation yet managed to start a world war 16 years later, which was surely not engaged in order to inflate the country’s money supply. Nor are wars and inflated money supplies guarantors of economic boom. The American colonies and the Confederate states each hyperinflated their currencies during wartime, but doing so did not help their economies; quite the opposite. With respect to war, the standard procedure today would be for the government to borrow to finance a war, which would not necessarily guarantee inflation. If new credit at current prices were unavailable, either the new debt could not be sold or it would “crowd out” other new debt. The U.S. could decide to inflate its currency as opposed to the credit supply. As explained in Conquer the Crash, doing so would be seen today as a highly imprudent course, so it is unlikely, to say the least. If it were to occur anyway, the collapse of bond prices in response would neutralize the currency inflation until the credit markets were wiped out. Despite these arguments, I concede that war can be so disruptive, involving the destruction of goods and the curtailment of commercial services, that the environment from the standpoint of prices could end up appearing inflationary. To summarize my view, the monetary result may not be certain, but an inflationary result is hardly inevitable.

There is in fact a reliable relationship between monetary trends and war. A downturn in social mood towards defensiveness, anger and fear causes people to (1) withdraw credit from the marketplace, which reduces the credit supply and (2) get angry with one another, which eventually leads to a fight. That’s why The Elliott Wave Theorist has been predicting both deflation and war. You cannot cure one with the other; they are results of the same cause.

Myth 2: “Deflation Will Cause a Run on the Dollar, Which Will Make Prices Rise”

This is an argument that deflation will cause inflation, which is untenable. In terms of domestic purchasing power, the dollar’s value should rise in deflation. You will then be able to buy more of most goods and services.

It is unknown how the dollar will fare against other currencies, and there is no way to answer that question other than following Elliott wave patterns as they develop. From the standpoint of predicting deflation, the dollar’s convertibility ratios are irrelevant. There may well be a “run on the dollar” against foreign currencies, but it would not be because of deflation. I think the impulse to predict a run on the dollar comes from people who own a lot of gold, silver or Swiss francs. They feel the ’70s returning, and so they envision the dollar falling against all of these alternatives. If deflation occurs, a concurrent drop in the dollar relative to other currencies would be for other reasons. Perhaps the dollar is overvalued because it has enjoyed reserve status for so long, which might make it fall relative to other currencies. If this is what you expect, what are you going to buy in the currency arena? The yen? Japan has been leading the way into the abyss. The Euro? Depression will wrack the European Union. Maybe the Swiss franc or the Singapore dollar. But these are technical questions, not challenges to deflation or domestic price behavior.

Myth 3: “Consumers Remain the Engine Driving the U.S. Economy”

Only producers can afford to buy things. A consumer qua consumer has no economic value or power.

The only way that consumers who are not (adequate) producers can buy things is to borrow the money. So when economists tell you that the consumer is holding up the economy, they mean that expanding credit is holding up the economy. This is a description of the problem, not the solution! The more the consumer goes into hock, the worse the problem gets, which is precisely the opposite of what economists are telling us. The more you hear that the consumer is propping up the economy, the more you know that the debt bubble is growing, and with it the risk of deflation.

……….

For more on deflation, download Prechter’s FREE 60-page Deflation Survival eBook or browse various deflation topics like those below at www.elliottwave.com/deflation.

• What happens during deflation?
• Why is deflation bad?
• Effects of deflation
• Deflationary spiral
• And much more in Prechter’s FREE Deflation Survival Guide.