I think it's just the limitation of the current driver and kinect. I removed all usb inputs and it was still the same. I have managed to get it working reasonably well, however, by placing the kinect on a tripod a good three metres away from where I stand. Also, the settings I use are:
Head Position Smooth 0.90,
Head Speed Factor 100,
Head Speed Smooth 5
Those settings seem to help, movement is slow but not so shaky. When I need to walk around, which is quite rare, it is fine. Just played an hour of Doom 3 standing up with psmove. The controllers were more annoying than the body tracking, so I think I have made some progress.
If other people could share their settings and how they have their room setup, maybe we can come up with an optimal configuration.