Any single indicator can fail to work at any time. It’s why we use many of them to gain the weight of the evidence.
But Commercial hedger positions in the USD argue that there is lower to go over time. Notice how previous USD corrections dating back to 2013 (clear correlations go back 20 years but I cut this chart off at 2013) have not ended until hedging activity came to near or above zero. In other words, the corrections did not usually end until hedgers ticked net long. At -28.5k this chart implies that the correction is not over unless something that has acted consistently for 2 decades fails to work this time. I would not bet on it.
I understand that a deflationary episode, which is my expectation, usually happens with a chronically strong USD to receive all that fleeing liquidity. But this time let’s consider a couple of side issues…
- USD negatively diverged the inflation trades from mid-2021 to September of this year, rising even though inflation hysteria was rampant, and…
- Treasury bonds and gold are candidates to compete for USD’s usual liquidity bid, especially if the Fed is forced to flip dovish sooner than market participants currently expect.
- Or perhaps inflation is just going into hiding for a few months before ripping back into play.
I am going to lean toward deflationary pressure in H1, 2023 that does not prove to be USD-centric on this cycle.