Month: December 2015

Following is Regression analysis forecast from averages 1 year, 2, 3, 5, 7 and 10 years. Evident from every average 1 year to 10 is EUR/USD and DXY cannot remain in present positions. Current Correlations warn of a serious breakout. The more EUR/USD and DXY range, the more severe will be the breakout. Current EUR/USD and DXY prices are operating almost on a 1 to 1 relationship. This cannot hold. DXY is overbought, EUR/USD oversold. DXY averages from 2 year to 10 are still in the 80’s. The 2 year average for example is located at 89.95 and current price at 98.00 is almost 1000 pips above. The 10 year average at 82.37 is 1600 pips above its average.
Since 2008, the market shifted to DXY ascendancy and saw a 105 top that hasn’t been seen again. After 7 years in the current cycle, at some point soon, EUR/USD will begin its ascent. My view is opposite to all the rest. I see EUR/USD heading higher.

For each average, a mean is offered and hi / lo ranges.
1 year average mean 97.44, high range 97.90, low range 96.77.
2 year average mean 97.34, high range 97.84, low range 96.83.
3 year average mean 97.27, high range 98.03, low range 96.50.
5 year average mean 96.36, high range 98.25, low range 94.46.
7 year average mean 95.65, high range 97.79, low range 93.50.
10 year average mean 94.75, high range 96.84, low range 92.65.
A range must hold because they are based on constants. If a price falls outside its ranges, then it must fall back inside.

DXY targets from averages using different metrics.
1 year target 98.32.
2 year target 97.34,
3 year target 94.40,
5 year target 90.92,
7 year target 89.45,
10 year target 88.58.

Extreme DXY prices, highs and lows.

1 year. 101.44 V 92.09, average 96.76
2 year. 112.13 v 67.76, average 89.94
3 year. 108.94 v 65.31, average 87.12
5 year. 105.51 v 61.74, average 83.62
7 year. 102.56 v 63.23, average 82.89
10 year. 101.00 v 63.73, average 82.36

EUR/USD Targets from averages 1 – 10. Vital points above 1.0956, 1.1007, 1.1100.

1 year. 1.0834
2 year. 1.0952
3 year. 1.1398
5 year. 1.1814
7 year. 1.2045
10 year. 1.2175.

Extreme EUR/USD prices, highs, lows, averages.

1 year.1.1658 v 1.0422, average 1.1040
2 year. 1.5636 v 0.8610, average 1.2123
3 year. 1.5866 v 0.9164, average 1.2515
5 year. 1.6102 v 0.9670, average 1.2886
7 year. 1.6201 v 0.9967, average 1.3084
10 year 1.6575 v 0.9975, average 1.3275

Brian Twomey, Inside the Currency Market, btwomey.com

AUD 2 year bond yields at current 2.02 is supported by monthly averages at 1.99 while 3 year bond yields at current 2.05 trades just below monthly averages at 2.06. AUD 5 year bond yields at 2.24 trades just below 2.28 monthly averages and 10 year yields at 2.84 trades below monthly averages at 2.85. AUD Q3 GDP at 2.5 trades exactly on the 1 year average line at 2.50. OCR at 2.0 trades below the 1 year average at 2.15 and far below 10, 15 and 20 year averages at 4.25, 4.46 and 4.63. Spreads 10 and 2 year are 0.79 while 10 and 3 month are quite high at 0.784. From the Minutes, Mining investment remains low, Growth in Asia slow, housing investment slow, iron Ore prices remain on the floor, monetary conditions worldwide remain accommodative. From the Sydney Herald, Toyota, Ford and Holden plan to leave Australia by end 2016 and threaten 200,000 current jobs.

EUR/USD’s position today and since Yellen’s Fed Funds raise and Draghi cut is exactly neutral. Neutrality through my interest rate models means, daily, 1 month, 3M, 6M and 1 year. Why. ECB and Fed Monetary policies converged rather than diverged as all the market people claimed. Prior to Draghi’s cut, Eonia V Fed funds stood at 0.8 V 0.15, a 65 Bps wide channel. Then Draghi cut to 0.70 while Fed Funds stands at 0.36, a 34 bps wide channel and a 31 bps convergence. if Yellen refused to cut then the channel would’ve stood at 55 bps and no big deal to continued EUR/USD downtrend.
We have convergence on our hands, not divergence. For all the stories about divergence, USD will do X, past USD acted like X in past cycles were all wrong. The 0.50 Fed Funds, 0.05 in ECB’s Fixed Rate and 0.30 in the Marginal Lending Facility is pablum information as it doesn’t drive markets or exchange rates. Interest differentials actually favor EUR/USD as Yellen’s raise and present convergence dead stopped EUR/USD’s downtrend.
Further to neutrality, European interest rates short term are in correct positions while long end positions still have light years to travel downward. Viewed from 1 year, every European interest rate is severely oversold as model averages are still adjusting to the first September 2014 ECB cut to 0.80. Long and short ends in European interest rates are fighting against each other in daily, monthly, 3 and 6m time frames to offer a further neutrality conundrum.
Convergence and neutrality means not a trend but slow price movements where tops are sold and bottoms bought to allow a price to remain in perfect neutrality until a market event breaks the deadlock. To define neutrality further, curves at the short end since yellen and Draghi offer about 18 pip ranges while long ends offer about 70 pips. Draghi cut at the exact time when the first September 2014 decrease was finally reflected in the market. Short ends now reflect the new cut while the longer ends will take much time, possibly 1 year to adjust.
Why intent focus on EUR is because EUR still offers the widest ranges among its peers. GBP/USD offers 31 and 27 pips between long and short ends while AUD and NZD offer 10 and 15 pips each. EUR/USD remains the pair to trade as it will outperform its counterparts despite its neutrality position. Points holding EUR/USD are 1.0850 – 1.0865 below and 1.1060’s above. Then comes the 1 year average at 1.1115 while a break of 1.0850’s would not only see the downtrend resume but 1.0700’s and 1.0600’s should be seen quickly.

Findings in a 12 sample, 8,000 + exchange rate study to encompass pre and post 2008 periods to determine the structural and positional relationships between and among EUR/USD, USD/JPY and EUR/JPY are many and varied.

As the most widely traded cross pair every year since reported in Triennial Surveys from 2001 and dated as far back as 1996, EUR/JPY embarks on periodic journeys, known periodic expeditions alongside definitive start and stop dates. The type of attachment EUR/JPY assumes with either EUR/USD or USD/JPY determines the period markets trade. From 2000- 2008, EUR/JPY shared an exclusive statistical relationship with EUR/USD in risk on markets as EUR/USD is a risk on currency pair. In the tested tenure from 1/5/2000 – 7/4/2008, EUR/USD traveled 6044 pips from 0.9773 to 1.5817 while EUR/JPY surged 6776 pips from 102.08 to 159.84.

USD/JPY concludes the triangular relationship for the same time frame as USD/JPY reciprocated because the statistical parallel between EUR/USD and EUR/JPY was substantially adverse. USD/JPY began 1/2000 at 101.51, bounced to 135.09 on 1/2001 then ended its time on 7/2008 at 103.65 for a 3144 pip drop.

As a consequence of the August 2008 market crash and the beginning of the next test series from 7/4/2008 – 4/15/2014, EUR/JPY transferred its allegiance from EUR/USD to USD/JPY in a new risk off market cycle, a duration that holds to the current day. The assumption is the first term lasted 10 years from the 1998 Asian crisis to the 2008 crash while the current period is in its seventh year and ongoing. August 2016 marks not only the eigth year since EUR/JPY and USD/JPY began their association but a new risk on episode is close when EUR/JPY again transfers its loyalty back to EUR/USD in risk on markets.

The correct measurement is the point of departure in EUR/JPY. August 2008 represented a wholesale positional change in EUR/JPY therefore the start date to view a periodic change is August 2008 othwerwise its possible to see over and /or undershoots in target prices and exchange rates due from skewed data. So precise and perfect is the currency price, an over or undershoot is impossible unless the calibration is deficient.

As an aside to add structure to the concept of market periods and not addressed in the current study, larger market protractions generally last about 50 years then comes a wholesale economic and sometimes political change. In the official 1982 US Gold report for example, Gold Vs Free Float currency epochs general durations are roughly 50 years dated from the 1500’s. If the December 1971 Smithsonian Agreement is measured as the free float commencement date, the current period enters year 45. Year 50 doesn’t prognosticate an imminent or guaranteed reversion to the Gold standard but it warns the next 50 year cycle caused possibly by war, economic collapse, political instability or all of the above is upon us.

Inside the 50 year interval are mini crashes, market changes and allows EUR/JPY to perform its function as not only a cross pair arranged as two opposite pairs but it also allows currency markets to be fully self contained entities because EUR/JPY trades inside EUR/USD and USD/JPY. Markets shift therefore cross pairs change allegiance as its intended purpose in design, construction and market function. The 2008 shift was a result of a market crash inside a duration of 10 years.

Its assumed the prior periods endured from the 1987 Louvre Accords to 1998 then from the 1971 Smithsonian Agreement to the 1985 Plaza Accords. EUR/JPY and EUR/USD reached maximim peaks in 2008 and USD/JPY its bottom. Therefore its also assumed the crash was a means to speed the newly arranged marriage between EUR/JPY and USD/JPY rather than take time through trading, time and structural statistical adjustments. An abundance of information was provided to discern a big big move was imminent.

Market crashes is a fascinating topic in currency markets but not well known because the modern day free float is in year 45 while the prior periods were dominated by Gold standards. The optimal comparison must include another 50 year free float time because currencies are priced in interest rates rather than Gold. The commonality from 1971 is a market event or crash occurs in 10 year intervals. If 50 year periods are viewed as 12.5 years then possibly 10 year time frames may be understood contextually as major turning points in currency markets but also switches in EUR/JPY, at least in the modern day 50 year term. The comparison in any period short or long term is found in FX Points, Forward Points or better known as the interest differential.

If Carry Trades are defined as interest differential income and price appreciation then the Forward Point or FX Point characterizes the actual trade. The Forward Discount defines the cost to carry the position or the Borrow side. The appreciation side is the premium but both exemplify the FX Point or interest differential. The goal in carry trades is to earn more FX Points than is paid to derive compensation to offset price depreciation in long positions. Synonymous terms exists in currency trading with slight deviations in its definitions: Forward Discount, Uncovered Interest Parity and Interest differential. The interest differential is translated to an FX Point. EUR is valued today at 132.54 and JPY at 0.0075. European Eonia trades today at 1.0192 and Japanese Call Rates trade 1.0760. JPY minus EUR translates to + 56 FX Points and minus 56 points as EUR minus JPY. In the forward market and a gauge to a current Carry trade based on FX Points, EUR/JPY should trade 132.59 – 132.48.

EUR/JPY is a currency pair whose price movements are best described long, short and intraday terms as wave patterns or possibly cycles as its purpose is to trade inside the bounds of EUR/USD and USD/JPY and never to leave the parameters. To trade direct center classifies the market as perfectly neutral and a rare day in the larger EUR/JPY picture. EUR/JPY waves because its movements are subject to the impulses of EUR/USD and USD/JPY.

Brian Twomey

Hi Sri, EUR/INR 72.95 and 72.52 vs 71.66 and 70.63. What decides higher is EUR/USD 1.0877. See how it sits at this price. Its only 3 days since the Draghi cut / stimulus, usually takes almost 5 days for prices to normalize. 1.0877 is important because its also a range break point as well as 1.0824 below. EUR/USD could fly either way. What I see is the overall trend is strongly down. On a 3 month forward line, I have 1.0922 and its slowly trending lower since the cut from 1.0977. If 1.0877 breaks and sustains then a larger range is found at 1.0877 – 1.1073. What I see is EUR/USD has miles to travel lower since the cuts are not even close to be reflected in the market. The market is still trading on the old rates so sell any rallies. I will keep you informed.

In the last post, we went from Danske bank’s interpretation of a two tiered system of interest rates in Europe to my own investigation, explanation and implications. The problem with the Two Tiered scenario is its not only wrong but far off the mark. Again,we have banks and analysts putting out PR documents without proper analysis just to show they are the first with an appearance that they are the smartest person in the room. I fault myself to not apply more critical analysis.
We have to think of a central bank purpose and that is to foster Lend and borrow in economies while managing the money supply. In hindsight, I’m not sure a Two Tiered system and add another interest rate in the mix is reality since the interest rate corridor compresses in Europe but think of the implications in this scenario for Denmark, Norway, Sweden, Switzerland and East European nations. A two tiered system is a wholesale change, central banks rarely institute major changes. What we saw from the Draghi cut was typical gradualism.

Prior to the Draghi cut, the interest rate corridor was 25 basis points between Eonia and the Main Refinance Rate and 50 basis points for the entire channel from Eonia to the Marginal Lending Facility. The corridor was balanced at 25 basis points from Eonia to the Main Refinance Rate and from the Main Refinance Rate to the Marginal Lending Facility. Libor to Eonia was 1 basis point wide, 24 basis points from Libor to the main Refi rate and 49 basis points from Libor to the Marginal Lending Facility.
After the Draghi cut, Eonia to the Main Refi rate now contains a 35 basis point corridor and 25 basis points from the Main Refi rate to the Marginal Lending Facility. Its a 35 and 25 basis point corridor and 60 basis point total. Libor to Eonia is now 10 basis points, Libor to Refi 25 and Libor to Marginal Lending 50 basis points. The current channel is 60 basis points vs Libor 50. But Libor to Refi is 25 and 35 from Eonia to Refi. Libor will begin a slow drift downwards. Libor dropped 1 full basis point from Wednesday’s cut to current.

Draghi expanded and extended QE. Here’s where the Two Tiered system was a lost proposition. Draghi needed the extra 10 basis points channel from 25 to 35 to allow more volatility inside the channel to vary his bond purchases inside the range. Forget QE under an added interest rate and compressed channel and forget time expansion.

The current EUR/USD price at 1.0879 trades below Libor and all European interest rates. The big points from current price above are found at 1.0995, 1.0932 and 1.0902. The top of the Libor channel is found at 1.1632. For EUR/USD to hit Goldman’s 0.9500 target then Libor and Eonia must see the deposit rates at -0.20 and -0.30. Long way to go.

Volatility from December 1 – 4 ran 2.0 annualized and 1.8 daily. December 1 – 2 volatility ran 2.3 annualized and 2.1 daily. December 2 – 4 volatility dropped from 2.0 annualized and 1.8. The warning for the massive rise was seen from December 1 -2 as volatility and price share an adverse relationship. 2.3 dropped to 2.0.

Constancio from the ECB stated the market misunderstood implications for the cut. The market actually got it perfect as the EUR/USD was at dangerously low levels and seen from volatility and interest rates. The timing of the cuts came at the Bottom of the Eonia channel. The ECB in my observation believed the EUR would see a massive drop instead of massive rise. Who am I to go against a central bank voter.

M 1 increased October to 11.8% from 11.7% September and broader M3 increased to + 5.3 from 4.9% September.