Month: March 2016

Crosspair allegiance and carry trades
By Brian Twomey

March 26, 2016 • Reprints

The carry trade is based on a simple premise: You buy (lend) a high interest rate currency and short (borrow) a low interest rate currency. The low interest rate currency becomes the fund currency while the high interest rate currency becomes the investment. The historical assumption is that as long as the condition of Uncovered Interest Parity fails, actual carry trades may last for years as an arbitrage until a possible shock hits the markets or until the disparity in interest rates compresses to Covered Interest Parity, whereby positions are covered.

In this first of two parts, we investigate the EUR/USD, USD/JPY and the EUR/JPY using regression analysis to determine where EUR/JPY sits in relation to both pairs in a carry trade. We found that EUR/JPY switches allegiance period to period.

Data & methodology
To understand the relative relationship and position of EUR/JPY in terms of USD/JPY and EUR/USD 5,532 exchange rates between weekly and monthly closing spot prices were documented for the pre-crisis period from Jan. 5, 2000, to July 4, 2008, and in the post-crisis period from July 4, 2008, to April 15, 2014. A total of 12 samples were observed, separated by weekly and monthly time frames for each paired relationships.

The year 2000 was chosen to yield consistency as it allowed one full year of euro market trading from its January 1999 introduction and because world central banks adopted interval meetings every six weeks. To further capture the true market price and accurate simple regression analysis, July 2008 was chosen as the start date for the post-2008 period because market prices failed to reflect the housing crisis dilemma that occurred in mid-August of that year.

For pre- and post-2008, EUR/USD and USD/JPY were employed as the dependent variable and EUR/JPY as the independent variable. To understand a true cause and effect, EUR/USD as the dependent variable was positioned against USD/JPY as the independent variable for both pre- and post-2008 periods, weekly and monthly. The research design assumption was EUR/USD or USD/JPY influences EUR/JPY but to guard against a false presupposition, EUR/USD was measured against USD/JPY to add validity and determine a possible positional balance against the sample statistics.

The U.S. dollar was chosen as it remains “on either side of every trade 87% post-2008 and 90% pre-2008,” based on the Bank of International Settlements. The euro maintains its status as the second most active currency, according to the BIS. The Japanese yen, third most traded currency, experienced a 63% increase in daily turnover activity from 2010 to 2013.

Correlations
Now we’ll take a look at the correlations between each crosspair pre- and post-crisis.

For the time frame of 2000 to 2008, EUR/USD and EUR/JPY not only shared a 0.93% correlation on a weekly basis but a healthier and positive r-squared covariance of 0.87%. Based on rho population parameters (a measure of variable dependence), the correlation and r squared values are significant throughout all samples. By 2008 to 2014, the weekly relationship shifted dramatically to a correlation of 0.60% and r-squared of 0.36%. This shift is apparent in the residual plots shown in “Non-stable relationship” (below). A similar shift occurred in monthly data.

We see a dramatic shift in the USD/JPY and EUR/JPY correlation from the pre- to post-crisis period. For the weekly time frame between 2000 and 2008, the crosspair correlation was a negative 0.11% with an r-squared of 0.01%, while the weekly period between 2008 and 2014 turned positive with a 0.91% correlation and an r-squared of 0.83% (see “Shifting signs,” below). The monthly data provided confirmation of this crosspair correlation shift, as the correlation was a negative 0.15%, with an r-squared of 0.02%, while it was a positive 0.91% with an r-squared of 0.82% from 2008-2014.

With respect to the EUR/USD and the USD/JPY correlation, an interesting relationship developed between 2000 and 2008 as the weekly correlation revealed a negative 0.45% and an r-squared of 0.20%. This further demonstrated the allegiance EUR/JPY shared with the EUR/USD pre-2008. In the 2008 to 2014 period, the weekly correlation of the EUR/USD and the USD/JPY crosspair turned positive at 0.22% with an r-squared of 0.05% (see “New era,” below). This relationship, however meager, also was confirmed in the monthly data.

As a consequence of the r-squared values, a 13% unexplained variation between EUR/USD and EUR/JPY pre-2008 existed, while post-2008 experienced an 18% and 17% unexplained variation between USD/JPY and EUR/JPY. For EUR/USD and USD/JPY pre-2008, 80% of the weekly variation is unexplained while the 77% variation is unexplained in the monthly time frame. Post-2008, there is a 95% unexplained variation in the weekly time period and 97% for the monthlies.

Looking at all the residual plots, we can see that all display constant variance across values, (also known as homoscedasticity) non-linearity to response variables, and lack autocorrelation. In addition, residual means are zero, therefore slope and intercept lines are accurate.

EUR/JPY allegiance
A possible explanation why the EUR/JPY crossrate transferred its allegiance from the EUR/USD to the USD/JPY is seen in rho as a measure of the correlation significance in the pre-2008 period.

Based on rho analysis, correlations for EUR/USD and EUR/JPY were approaching the upper limits of the 95% and 99% significance percentiles for the weekly and monthly periods. As a corollary, USD/JPY and EUR/JPY approached critical 95% and 99% rho limits for both the weekly and monthly time frames. EUR/USD possibly saw its meridian against EUR/JPY and USD/JPY, a possible base, evidenced by rho.

Therefore, EUR/JPY was in a crucial position, particularly when EUR/USD and USD/JPY shared essentially no relationship by unexplained variations in both pre- and post-2008, based on the correlation coefficients reported above.

What is fascinating is that EUR/JPY not only chose to strengthen its relationship to USD/JPY post-2008, but the alliance came full circle, as the dependence pre-2008 was negative and the correlation not only became positive following the crisis, but approached rho’s upper 95% confidence interval.

Covariance
Covariance further reveals a strong positive relationship between EUR/USD and EUR/JPY pre-2008 on the weekly and monthly time periods. Conversely, USD/JPY and EUR/JPY pre-2008 show a strong negative association.

By the post-2008 period, covariance values had reversed on the weekly and monthly time frames to reveal that USD/JPY and EUR/JPY shared a vigorously positive alliance and EUR/USD and EUR/JPY had a barely positive relationship. As the relationship between EUR/USD and USD/JPY was barely negative pre-2008, the post-2008 period shows a slight positive relationship based on variance.

Covariance addresses first the question of joint distributions. The magnitude of covariance is defined as how far X and Y vary symmetrically from their means as a dependent rather than independent relationship. If X and Y were independent, both variables would assume zero correlation.

Covariance values are linear associations and intended to measure strength of associations. Correlation is an inequality and unit less due to its +1, -1 measure but represents a measure of a sample to address questions of cause and effect, coincidences and sample co-variation.

Covariance defines correlational strength. By measuring X and Y minus means and obtaining positive deviate values, X and Y means are positive and co vary, as was the case for EUR/USD and EUR/JPY pre-2008. Covariance is found between the bounds of correlational +1 and -1. Essentially, covariation removes part of the variability of Y that co-varies with X and focuses on the remainder sections: The residual variance.

What allowed EUR/JPY to assume a strong positive relationship with EUR/USD pre-2008 was that USD/JPY had a negative covariance with EUR/USD; USD/JPY means were negative while both EUR/USD and EUR/JPY means were positive. When the August 2008 housing crisis emerged, means for EUR/USD, USD/JPY and EUR/JPY all dropped considerably, but USD/JPY and EUR/JPY prices fell below respective means. Therefore, a new covariance relationship formed as USD/JPY and EUR/JPY.

EUR/USD maintained a weak association with EUR/JPY because EUR/USD prices remained slightly above their mean and the aftermath was lower correlation and r-squared values. Had EUR/USD prices fallen below their respective mean, EUR/USD and EUR/JPY as a covariance and correlation relationship would have completely severed and melded into a shift among the three pairs because USD/JPY was below its complementary mean. EUR/JPY choices at this juncture were either to break above the mean and reattach to EUR/USD or assume a new relationship with USD/JPY. EUR/JPY shifted allegiance from EUR/USD to USD/JPY.

Carry trade crash risks
Many studied the concept of carry trade crash risk. Brunnermeier, Nagel and Petersen (2008) reveal that investment currencies are subject to crash risk because of funding constraints relative to the implied volatility of the S&P 500. Burnside (2011) failed to classify the housing polemic as a crisis because his portfolio consisted of carry and momentum. If carry lost, then momentum profited. Hutchison and Sushko (2013) look at carry trades and macroeconomic surprises as they relate to global risk.

If the carry trade in interest rate terms and EUR/JPY’s positional change is an assessment, Europe, Japan and the United States experienced reduced interest rates since 2000. The U.S. fed funds target rate in March 2000 was 6.50%, and the Euro refinance rate was 5.75%.

The USD/EUR carry trade was the opportune position until September 2007 when the fed funds rate fell to 4.75% and the refinance rate was 5%. The EUR/USD became the new carry trade until post-2008 when both rates equalized to 0.25%.

Both the USD/JPY and EUR/JPY worked as a carry trade pre- and post-2008 because Japan’s base rate, the overnight call rate, was 0.25% in August 2000, 0% in March 2001 and 0.50% in February 2007. The overnight call rate today is 0.1%.

Gyntelberg and Remolona (2007) and many others identified the failure of the Uncovered Interest Parity condition in five-year time horizons. August 2014 was be the sixth approximate year for the USD/JPY and EUR/JPY relationship.

A speculative assumption, and a topic specific to carry trade crash risk, is that EUR/USD and EUR/JPY began their association at the time of the 1997-98 Asian financial crisis. The relationship was found in 2000 as research began. How long the relationship existed is unknown. What is known post-2008, is that the EUR/JPY and USD/JPY relationship mirrors the EUR/JPY and EUR/USD before the crisis. The question of whether a market crash will occur to force a breakdown of the allegiance to cause the EUR/JPY to switch loyalties again to EUR/USD is unknown, nor is it known if a market implosion is the essential element to experience a change.

In this first of two-parts, we examined the statistical relationship between the EUR/JPY, EUR/USD and USD/JPY and how that relationship shifted between the pre- and post-crisis periods. We also looked at the carry trade and crash risks and examined both weekly and monthly values. Next month, we will take a closer look at the evolution of the carry trade definition, explore the carry trade balance and discuss how economic change and money supply have impacted that balance.

About the Author
Brian Twomey is an independent trader and author of “Inside the Currency Market: Mechanics, Valuation and Strategies.”

Dead stop at 1.1411 was perfectly normal against further points after 1.1407 from this morning. Sell to 1.1379 and 1.1373 was also perfectly in line as dead stop occurred at 1.1377.

NFP forecast 205 V 242 last month. Look for range 155 – 255. Above 255, EUR/USD dives all day fast and hard. Below 155, EUR skyrockets. In range is in in range for EUR, means no dramatic moves either way.

Note to new readers. Ranges, targets, MA lines, points and levels are highly dynamic and change constantly. I simply update for next trades. Previous lines, targets, points and levels are gone and no longer mean anything.

EUR/USD. Bottom. 1.1324. Larger range 1.1324 – 1.1436. Range above 1.1399, 1.1504, Below 1.1363 and 1.1259. Two important lines above 1.1388 and 1.1395, notice both below 1.1399 range point. 1.1399 must break as well to go higher. Targets 1.1506 target, failure point 1.1436. Our spreads are fairly wide so monitor points on the way up. To head much lower, we need a failure at 1.1409. Points on the way up, 1.1396, 1.1409, 1.1422, 1.1436, 1.1442 1.1453, 1.1471, 1.1488, 1.1506.

Shorts below 1.1381, target 1.1352 then 1.1324 Bottom. Points 1.1380, 1.1373, 1.1366, 1.1360, 1.1342, 1.1333, 1.1324 Bottom.

Brian Twomey, Inside the Currency Market, btwomey.com

A Statistical Price Path is defined as a price path with a defined direction and cannot leave the path until the end result is complete. End result is usually a target price. A target price must complete in order to travel to the next Statistical price path. EUR/USD rises against severe tops is an example of a statistical price path. EUR/USD constant rises against previous 1.0800’s is another example. Draghi or Big Sis Yellen can’t stop a statistical price path. A news event can’t stop a statistical price path. News events or central banks may knock a price off its intended path but its meaningless because the price path must complete its original destiny. Central bankers belief in their own power is unfounded cause zero power exists. Listening to these central bankers is like following a deceptive false god. Post 2008 was the focus on central banks and its when they believed they were important yet they lack old fashioned humility. Front and center with all the cameras as if they are beautiful models posing for the swim suit issue. Between the narcissism of central bankers and false gods of cameras leading traders astray, its a recipe for disaster because the narcissists feel they must deliver and they are always wrong. Anyone can trade a statistical price path and never listen to one word of a central banker or news event. Life begins in either a logarithm or a Standard deviation. This is where the building process begins. Building is the operative word because false foundation can occur. Only few math formulas work against a currency price. Two indicators work. McGinley Dynamic and Bill Williams Alligator. McGinley is by far the best as we tested both for months on end.

EUR/USD. Bottom. 1.1262, 5 pip drop from overnight. Larger range 1.1262 – 1.1441. Ranges above 1.1441 and 1.1578. Below 1.1335, 1.1300, 1.1205, 1.1196. Target 1.1441, coincides with range 1.1441, watch this if seen. Failure sell point 1.1373 and 1.1381. Level break 1.1441 opens flood gates to 1.1526, 1.1661, 1.1781. Target achieved at 1.1441, sell to target 1.1379. Target 1.1373, sell to target 1.1345. Past days, we saw full target misses, means sell the failure areas. Points on the way up, 1.1321, 1.1324, 1.1332, 1.1347, 1.1360, 1.1373, 1.1390, 1.1407, 1.1441.

Shorts must break 1.1317, target 1.1289 then bottom 1.1262. Watch for reverse at 1.1289 to then target 1.1321. Remain short on break 1.1289 to target 1.1262. Then reverse to 1.1289 and higher if 1.1289 breaks.

Brian Twomey, Inside the Currency Market, btwomey.com

As mentioned Target 1.1364 done, reverse short to 1.1333 target achieved 1.1317. Trades posted are all hand calculated.

EUR/USD is rising in a top so not a EUR move happening. The curve still points down. Until significant breaks occur, direction overall is still short. EUR/USD is currently on the do or die verge. Yellen says slow and gradual. 100 basis points separates most Negative Interest rate nations especially Europe. Normal times, 100 basis points or 1% is meaningless

Bottom. 1.1267. Larger range 1.1267 – 1.1381. Range points above 1.1357 and 1.1446. Below range points 1.1288, 1.1201. Target 1.1448 and fail point target 1.1381. Level 1.1381 is vital break to go higher to target 1.1414, 1.1431 and 1.1448. Level 1.1448 opens flood gates higher to 1.1612, 1.1777 and 1.1830. Note 1.1448 target and 1.1446 range point, tough area to break. Look for target at fail point at 1.1381 then reverse short to target 1.1352. Points on the way up, 1.1326, 1.1339, 1.1353, 1.1367, 1.1381.

Shorts. Break 1.1322 targets 1.1294 then bottom at 1.1267. Longs from 1.1267 targets 1.1294 then 1.1322. Points on the way down, 1.1317, 1.1310, 1.1303, 1.1296 then range point at 1.1288. Then 1.1281 and Bottom 1.1267.

Pip range 23 pips short and 97 long term.

Brian Twomey, Inside the Currency Market, btwomey.com

A long time friend/Follower from beginning Fxstreet days is now hitting multiple targets. His approach offers a slightly different but highly fascinating and interesting dimension. I saw this new dimension once from my long time friend at Thomson Reuters. To insert context, my TR buddy is in his 42nd consecutive year in FX and markets. My Fxstreet friend worked very hard to find the latest angle. Another trader is hitting single targets regularly for the past month and doing just fine. Now is the time as mentioned many times as markets are changing rapidly so traders will need the angle to beat and remain in tune with the market. More interesting posts on the way. End of month is here, we must view the DXY EUR/USD relationship. My next feat, I’m looking for a multi multi month trade so we track, hit targets and follow over the many months.

EUR/USD. Bottom. 1.1246. Larger range 1.1246 – 1.1359. Range points above 1.1390 and 1.1371. Below 1.1232 and 1.1215. Targets 1.1433 and 1.1364. Big points to head higher, 1.1309, 1.1318, 1.1331, 1.1346, 1.1359. 1.1381, 1.1399. Biggest points 1.1359 – 1.1364. Watch for reversal here and 1.1371 range point. Shorts from 1.1364 targets 1.1333. Shorts from 1.1359 targets 1.1331. Point 1.1443 is big level to open flood gates to 1.1513 and 1.1599. EUR/USD is way way overbought, look again for shorts. Remember DXY V EUR/USD post, 1.1300’s out of bounds. Levels, 1.1452 and 1.1603 current descending lines.

Shorts. Shorts below 1.1301. Target 1.1273 then 1.1246. Points on the way down, 1.1395, 1.1302, 1.1296, 1.1288, 1.1282, 1.1277, 1.1261, 1.1253, 1.1246. Then 1.1239 and range point 1.1232. Look for longs 1.1232 – 1.1246 to target 1.1273.

Pip range today, 23 short term and 98 long term. Problems exist at the 98 point.

Brian Twomey, Inside the Currency Market, btwomey.com

Shorts

Most important event this week is Time changes in Europe, UK and Switzerland. Time across major nations is broken into March – September and September – March. What changes is 1 hour. So Fix times in American markets go from 8:30 to 9:30 and from 11:00 am to 12:00 noon for the UK. The US remains 12:30. japan goes to 8:50 pm. Canada changed with the US March 13th so Noon day fixings remain the same. CHF I believe goes to 12:00 Noon as well.

EUR/USD Larger range is found 1.1107 – 1.1218. Bottom 1.1107. Shortest term ranges, 1.1179, 1.1265 then below 1.1145, 1.1060, 1.0939 and 1.0861. What’s special about 1.1218 is next above targets becomes 1.1223 and 1.1290. Most important is 1.1290 because then flood gates open for EUR/USD to go far higher. Pip ranges 23 pips.
Strategy is short to first target 1.1135 then 1.1107 and eventual target 1.1061 range point. Big lines above 1.1178, 1.1201 then above falling lines at 1.1413.

NZD/USD. Bottom. 0.6654. Ranges above 0.6770 and 0.6811 then below 0.6605 and 0.6565. Most important points above 0.6695 and 0.6717 because then flood gates open to 0.6800’s. New Zealand 10 year yield is mis aligned, its price should be much lower than current 3.06. The strategy is short to target 06671 then 0.6654 and eventual range bottom at 0.6605.

Brian Twomey, Inside the Currency Market, btwomey.com

Central banks offer daily bottoms, today’s EUR/USD bottoms 0.9494, 0.9553, 0.9815, 0.9855, 1.1098. Central banks offer tops, today’s daily tops, 1.3329, 1.3273, 1.2548, 1.2628,1.1441, 1.1383, 1.1167, 1.1153. Why offer bottoms and tops, protect bottom from possible market implosion but allows big corporate and big money investors to trade a far distant exchange rate for 2 – 20 years. Its common everyday.

As traders today, we care about 1.1441, 1.1383, 1.1167, 1.1153. Then bottom 1.1098. Today’s target 1.1274 and failure point 1.1209. Failure point is new overall and added as protection against today’s and any day’s target. The overall target may not achieve and fail at 1.1209. Targets achieved or not screams big messages to next price target. Normal days, I would say longs to target 1.1274, exit for profit then reverse short to target 1.1213, exit shorts for profit. Longs fail at 1.1209, I say exit at 1.1209, profit then reverse short to 1.1181. Exit for profit. Unless 1.1181 breaks then target becomes 1.1167. Then 1.1167 becomes next long or short point. Targets become 1.1181 or 1.1153. So small, we may not want to touch this because price may go dead.

Structure. Target warning is found at 1.1167, then ranges. Above 1.1204 and 1.1205 then below 1.1102. Further, we know 1.1441 and 1.1383 are descending lines. We know 1.1167 is big break. Price today stopped at 1.1170. Where is 1.1170, don’t know without investigation. Normally its a mid point somewhere among the bigger points. If 1.1170 is not found then it says 1.1167 was an official break and EUR/USD price is going higher. It only takes 1 pip to declare a violation to know next price direction. Further, a top is in place and its very strong. Target warnings, range breaks 1.1204, top in place, 1.1167 big break, descending 1.1383.

Pip range. Today, 96 pips long term, 22 pips short term. If ever a screaming warning existed, its here because it says overall range problems exist in today’s overall curve. Its the 96 that’s scary while 22 is light but its also normal. Best EUR/USD offers on range pips is roughly 50 – 60 pips. Range problems will stop a price progression quickly. Range problem may very well be the reason 1.1167 violated to 1.1170. Its very possible.

Bottoms. We needed breaks at 1.1153 to target 1.1125 then 1.1098. We don’t ever look for 1.1098 to break. If 1.1098 is achieved, we are long to target 1.1125 then 1.1139. If 1.1125 holds then target still becomes 1.1139. Chances are good, we reverse at 1.1139 to target 1.1125.

Points to achieve targets Above, 1.1156, 1.1168, 1.1181, 1.1195, 1.1209.

I designed this price system. I call it my Statistical Price Path because it allows multiple targets to achieve with known ranges, pip ranges. Protections in my models are always built in every step of the way to protect us. We don’t ever lose, never bail out of a loser. We don’t need stops especially when we hit multiple targets within OH? 1 hour, 30 minutes. Sometimes 2 hours. But we always hit. And we hit perfectly as outlined. 5 AUD trades are on site here somewhere. I hit 5 targets, 5 different pairs within like 1 hour. I did this a few times. Normally we do 2- 3 pairs per day valued with profit values at easily 50 pips per pair, per trade. Most times much more. The problem if any are dead days. targets are identified but price doesn’t move. In those cases, we take our few pips profit, exit and wait for the next day.

Brian Twomey, Inside the Currency Market, btwomey.com

The focus on exchange rates as is the orientation for most is not only absolutely wrong but its what leads to the hits or misses routine for a vast majority, including many hedge funds. My words are backed by written facts in my notebooks over a 12 year period. Most don’t know or understand exchange rates prices, movements, purpose and orientation Most can’t know because its not exchange rates that shares the commonality between and among nations. So here’s guys trying to hit moving targets that lack connection or commonality nation to nation in a one size fits all approach. AUD is not NZD and EUR is not AUD or NZD. Three separate nations can’t match against 3 separate national orientations. My long time and ongoing work on interest rates and curves is astounding and groundbreaking. As new research information is learned, we upgrade our curves and orientation to maintain perfect accuracy. So groundbreaking and more accurate is our approach, I have yet to see my work in print by big banks and I receive tons of interest rate research.
My work and latest upgrades allows us to not only hit targets, but we know tops, bottoms ranges, pip movements and points in between. This isn’t new, what’s new is easier ways to calculate so we gain speed in our trades. We are able to follow and know a complete price outline so to hit multiple targets within a price path. Our focus is price but we maintain a price view by understanding the overall structure. Structure allows ability to hit multiple currency pair targets as was done here many times. Structure is most important because we gain the same advantage as the market whereas most one size fits all guys lose as the market price beats these guys by 20 – 30 pips. And they aren’t aware they were beat.
Think about trading as a musical instrument. To play accurately is to know the proper notes and chords then melodies are derived from notes and chords All together, means perfect songs are played. Enough.

AUD/USD. Bottom. 0.7511. Ranges above 0.7536, 0.7587, below 0.7486, 0.7436. Target above 0.7549, tough area here and assumes range break 0.7536. Use 0.7536 as failure point to get short to target bottoms at 0.7511. Correlation with EUR/USD is positive 13%, its low but improving from negative. AUD becomes out of bounds at 0.7549 but has ability to spike to 0.7562. We’re pretty much in a 0.7511 – 0.7562 range. Pip range today 21 pips long term, 17 short term. Big points above 0.7535 and 0.7540. EUR is heading lower over time as is the situation for AUD. Below 0.7511, we want to hit 0.7486 target next.

Brian Twomey, Inside the Currency Market, btwomey.com

EUR/USD. Mentioned points are exact. Bottom. 1.1121. Daily pip ranges, 63 long term, 21 pips short term. Ranges above 1.1210, 1.1245, Below 1.1142, 1.1108 and 1.1065. Targets 1.1299 and failure 1.1229. Targets are almost irrelevant as the curve has problems still due to the Draghi cut and imminent EU changes ahead. Plus, we have a severe top in place for today. Longs not recommended.
Overall, descending lines 1.1464, 1.1279 and 1.1190. Look for sells in the 1.1190’s area. Targets below range bottoms 1.1142, 1.1108 and 1.1065. EUR/USD is heading light years lower.

Brian Twomey, Inside the Currency Market, btwomey.com

As 1980 adoption of Supply Side economics was replaced in favor of Keynesian stimulus by many nations due to the 2008 crisis, interest rates in 10 nations from 2008- 2009 experienced not only the largest collapse year over year since the crisis at a negative rate of change of 24.94% , minus 19.72% year over year but the downward trajectory continued to present day. Easily arguable is interest rates peaked from the 2003 – 2006 economic boom because of the 2007 – 2008 minus 20.93% rate of change and minus 3.581% plummet year over year. Viewed from 2014 – 2015, the negative rate of change was approximately 40% of the 2008 – 2009 depreciation and minus 8.58% year over year. The violent reductions were seen specifically as 2008 – 2009 experienced a 20 index point plunge while 2014 – 2015 lost nine points. Year 2008 was a turning point for markets and central banks as the policy choice dilemma was stimulus or adjust for the future.

As regressive stimulus policy was chosen and viewed from the January 1972 free float separated by four quadrants with each quadrant valued at 12.5 years, 2008 was the demarcation line of the 3rd and 4th quadrant. Stimulus policy expedited markets into the current 4th and final quadrant. Since 1694 and Bank of England establishment as the world’s first central bank followed by Scotland in 1695, its customary and traditional for central banks to adopt questionable 4th quadrant policies to last to the final 50th year when a new market period highlighted by prosperity reigns. Sir Isaac Newton began cycles and quadrants when as Chancellor of the Exchequer overvalued Gold in relation to Silver in 1717. Further 50 year market periods 1770 -1820, 1820 – 1870, 1870 – 1920 and Gold wars of the 1960’s were characterized based on Gold’s fixed valuations. Why 4th quadrant policies are generally questionable is because of traditional 2nd quadrant market crashes. New policy prescriptions are implemented in 4th quadrants as third quadrant corrections end from 2nd quadrant crashes.

A 10 supra national Simple Interest Rate index was constructed to determine not only the current economic context but interest rate situation particularly as it relates to the five negative interest rate nations. The 10 nation supra national index includes Switzerland, Europe, Japan, Sweden, Norway, United States, UK, New Zealand, Australia and Canada. Interest rates include Saron -Switzerland, Eonia – Europe, OCR – New Zealand, OCR -Australia, Call Rates -Japan, Stibor – Sweden, NOWA – Norway, Fed Funds – United States, Sonia- UK and Corra – Canada. Negative interest rate nation Denmark was slated as the 11th cohort but the Denmark Central bank in cooperation with the Danish Bankers Association is in transition to transfer Tom/Next data responsibilities to NASDAQ OMX. Current data rather than historic was a severe problem to obtain. Negative interest rate supra nationals include Switzerland, Europe, Japan, Sweden.

Monthly data was aggregated from January 2007 – January 2015 for each index component and calculated as simple moving averages recorded in successive order from 1 – 9 years for each nation, a total of 90 moving averages. Data points total 1080, 108 monthly averages for each nation. As a Simple Index, 2007 was the base year to view specifically 2008 – 2015. Overnight interest rates constitute the commonality amongst index component interest rates.

As many nations abandoned Libor Fix participation, central banks began a long arduous process to review national commonalities to revamp overnight rates. Traditional overnight rates were set low to both balance end of day bank surpluses and deficits but also to gain competitive advantge in other nations’ markets. Why overnight rates is due to disjunctions between and among nations in specific markets. UK and the United States for example lacks a 60 day maturity relationship while New Zealand and Australia is void in the 1 year maturity connection. The most important consideration to revamp overnight rates was re-establish corridor systems inside respective nations markets as well as between and among nations.

The ECB corridor from Eonia to the Refinance Rate was traditionally set at 75 basis points post 2008, 100 bps since Euro introduction but due to four Eonia reductions from June 2014 to current day, the corridor is today 60 bps. Further current corridors: US from Fed Funds to headline is 14 bps and 77 bps from Eonia to Fed Funds. Japan to Europe is measured at 30 bps and 47 bps to Fed Funds. Australia and New Zealand share a 25 bps relationship, 77 and 88 bps from Fed Funds. Inside Australia, the corridor is five bps and eight for New Zealand. Swiss to Europe allocates 30 bps , 30 bps to Sweden, 20 bps to Canada, 1.07 to Fed Funds. The UK to Europe corridor is 80 bps, 9 bps to Fed Funds and four inside the UK. Not only did interest rates peak in 2007 but corridor compression is the result of adoption of Silvio Gesell’s first time implementation of negative interest rate experiments.

Based on Gesell’s 1906 “Natural Economic Order” and 1891 “Reformation of Coinage as a Bridge to the Social State”, central bank policy delineates three factors of Gesell: stop the rate of interest growth, contol money velocity and stop exchange rate appreciation. Velocity is key especially as money is directed inside small corridors. If money supply velocity is measured as GDP divided by monies in circulation then the object to money circulation is to channel money inside smaller corridors. Economically, velocity equalizes goods and money relationships to determine prices and stabilize purchasing power. Money is stagnated by rates of interest growth and if removed, GDP would rise quickly to the point negative interest would be justified. Gesell views interest rates in reverse order as prices drive interest rates rather than rises and falls in money supplies.

A further policy to ensure money direction inside corridors is to eliminate interest rate maturities then connect remainder interest rate categories to an interest rate Fix based on volume. The ECB constituted 15 maturities upon Euro introduction then eight in 2013 and five maturities will be offered July 1. The Federal Reserve adopted volume weighted medians March 1. Consolidated maturities allows future interest rate rises and reductions to normalize expeditiously. The ECB for example normalizes many months post rate rises or falls while New Zealand and Australia normalize within days. The downside to consolidated maturities and volume Fixes are ability to control and slow volatility.

As 2008 – 2009 experienced negative rates of change of 24.94% and minus 19.72% year over year, overnight rates continued a slower rate of change decline until 2014 – 2015 accomplished negative 19.02% rate of change and minus 8.58% actual year over year. The ECB was first in June 2014 to slash Eonia to zero then entered negative territory September 2014 followed by the Swiss in December 2014 and Sweden Q1 2015. Canada reduced Corra January 2015 while New Zealand dropped OCR from January 2008 at 8.25% to current 2.25%. While rates of change slowed from 2008 – 2014, actual year over year changes maintained a steady rate of decrease as 2012 -2015 achieved minus 30.23% collectively yet the full contraction began aggressively again in 2011 from 2008 minus 33.23% and negative 19.72%.

The mean of the 2007 base period was 1.7109 and consistent as measured against forward rates year over year although seven year rates calculated six years forward at 1.9762 lacks synchronicity to remainder yearly maturities. Correct forward curves are smooth and ordered maturities alongside sufficient distance to allow trades between rates. An out of sync maturity alters curve dynamics. Year 2010 as the six year rate experienced an increase in yearly averages, index values and stagnant rates of change. Rates of change and year over year values were factored to 0.64% and 0.39%. The two year rate, 1 year forward, three year rate 2 years forward and four year rate, three years forward factor to 1.9317, 1.9392 and 2.12. The enormity of the eight to nine year rate of change of 33.23% is viewed from the eight year rate, seven years forward at 6.95 and the precipitious drop seen seven years later to current 1.9317.

Descending forward rate lines means a huge hurdle must be overcome if ever interest rates change course and rise. In volatile and uncertain interest rate markets, ability to lock in forwards for future dates becomes harder to pinpoint the correct tradeable maturity. Hedges must adjust constantly.

The Carry Trade measured from high to low mean index values and calculated to foreign exchange pips reveal 10,860 pips were lost since 2007, 7279 since 2008 and under the current 11,679 mid point. The index began in 2007 at 17109 pips and ended January 2015 at 6249. In actual yearly pips lost, 2015 experienced the sharpest decline at 1080 pips. In 44 years of currency trading since the January 1972 free float in monthly averages, 18 years reveal 1000 pip or more years and 10 years experienced 1500 pips or more. Falling interest and exchange rates lends uncertainty to carry trades as a steady source of income, currency value appreciation and yield gain.

Aggregate weights were calculated year over year to confirm not only the divison between the 6 and 7 year maturities but also confirms the downslope year over year. Aggregate weights rarely hold enormous tradable revelations however weights provide insights to positions and possible adjustments as the Simple Index is oversold while aggregate weights lean towards overbought. The monitor for the future is possible base effects or at least a slower rate of change as aggregate weights reveal 1.2349 from year 2015.

Among the five negative interest rate nations, Swiss Saron is negative to the seven year average while Eonia is negative to the three year. Stibor is negative to the one year average while Norway and Japan remain positive from 1 – 9 years. Denmark’s Tom /Next rates as speculation based on compiled data is negative to the four or five year average.

As Quantitative Easing met Keynesian liquidity traps when interest rates attained zero and intended economic effects failed to materialize, negative interest adoption appears as a new method in continuation of the 2007 peak. Negative interest is a break of the positive zero point as ranges encompass 0.0 – 1.0. While zero is the bottom, negative zero represents catastrophic collapse because money would achieve negative value. As ranges, Sweden and the ECB remain middle bound while Japan and Norway are top of the range. Denmark and Switzerland are located at bottom ranges.

The crisis and precipitious drop in 2009 – 2008 offered downside trend momentum. Central banks not only adopted Gesell’s negative interest rate theories but follow Gesell explicitly in terms of exchange rate depreciation, slow interest rate of growth and channel money velocities. The current period represents implementation yet the future question once interest rates bottom and reverse course is how to view quantatitive easing or will central banks revert to supply side policies by addition and subtraction of daily money to balance the system. This question assumes success in current implementation. Negative interest is not only here to stay for the foreseeable future until Inflation targets are achieved but more central banks are expected to adopt negative interest rates to remain competitive. Norway, Bulgaria, Czech Republic and Isreal are possible candidates.

Brian Twomey, Inside the Currency Market, btwomey.com

AUD drivers are the OIS curves due to an agreement signed between the RBA and and BOJ March 18. Its a rare day post 2008 crisis to see OIS curves as main price drivers. What this means shortest term is big supports are found in AUD as parts of the overall curve becomes out of sync. Today’s curve is no different as out of sync now begins until the BOJ are done. Most important AUD event is today’s speeches by Big Glenn Stevens and Malcolm Eddy at the yearly Financial Markets meeting. Debelle was scheduled to speak but his name isn’t listed as speaker. We want to know specifically what changes are ahead for the AUD system and how those changes will be implemented. Also, how will the relationship to EUR evolve. Big changes are coming for currency markets. For AUD, its a strict market system as was the case in 200 years of Australian history. Changes will be strictly market oriented as opposed to EUR and the ECB.

AUD/USD Bottoms 0.7612 and 0.7537. AUD shorts must cross 0.7603, 0.7599,0.7578 and 0.7574. Expect a few pips difference as American markets open. Pip ranges today 21 and 17 pips. AUD ranges: 0.7625, 0.7624. Further above 0.7729, 0.7827. Below 0.7524 and downside target later upon break at 0.7537. Further wider ranges overall 0.7154 and 0.8021. AUD current location is at upper range. AUD targets today 0.7616, 0.7623, AUD is out of bounds at 0.7648. AUD downside is tough against current supports but topside is way overbought so trading AUD today may be quick in and outs but longer term trend is down as target would be 0.7330 next over time.

Brian Twomey, Inside the Currency Market, btwomey.com

Last month was reported EUR/USD location should be at 1.1300 – 1.1400 and was perfectly comfortable. EUR/USD achieved the levels and is perfectly comfortable in its current range. However the EUR/USD topside is now dropping and light years of downside exist below but big downsides will take more time.To understand the downside for the week and month, extremes in EUR/USD are found at 1.1558 and 1.0477. For now, Monthly averages 1,3,7 and 10 are in range however the 10 year range top is found at 1.1317. The longer EUR/USD ranges, the more the downside is favored. Don’t lose sight Draghi cut again, a cut not yet seen in the markets and may not be seen for another month or maybe two as the ECB is the slowest central bank to normalize after rate rises and falls.

Topside points 1.1281, 1.1290, 1.1302, 1.1317, 1.1373. Further 1.1406, 1.1457, 1.1470. Downside points and outside range bounds 1.1290,1.1104, 1.1092 and 1.0477. Downside must break, 1.1203, 1.1092 and 1.0897. The 10 year average topside is 1.0897 and bounded by bottom at 1.0477 and top at 1.1317. The 10 year average against current points and ranges reveals the commentary for EUR/USD downside. The 2 and 5 year monthly averages are out of range at 1.1406 and 1.1586. At 1.1586 leaves the 3 year average out of bounds at 1.1500. Direction is down, rallies should be sold and target much lower over time.

DXY. From current 95.07, topside at 97.00’s is out of bounds from averages 1, 2, 3, 5 and 7 year while 94.00’s are out of bounds at the 1, 2 and 3 year but hold supports at the 5 and 7 year averages. As DXY ranges, topside is favored. Correlations to EUR/USD are 98%, means EUR/USD and DXY are at 1 for 1 pips. 1 pip drop in EUR/USD is 1 pip rise in DXY.
Topside points and out of bounds, 97.78, 97.11, 97.08, 96.99, 96.64. Bottoms and out of bounds 94.53, 94.45, 94.38, 93.40. Supports 94.84, 94.15. Vital points 96.12, 95.89, 95.81, 95.69.

Strategy. Buy DXY drops and sell EUR/USD rallies. DXY is going far higher over time. Eventual target is 102.00’s and 1.0600’s to 1.0500’s for EUR/USD. DXY line is now at 144 and a 22 point drop in the last 3 months. Says we’ve seen little to no action in prices overall. We’ll continue to follow this situation daily.

Brian Twomey, Inside the Currency Market, btwomey.com

A deeper view in DXY, EUR and other pairs will post today? tomorrow. Modern Trader Magazine, formerly Futures Magazine, now subscription, is running a two part series April and May on my EUR/JPY Paper. June publishes a deep analytical view on an interest rate article on 10 nations. Might post it here shortly. Systems remain down as we’re doing changes and upgrades. EUR/USD post below is hand calculated, takes time to do this and remain perfectly accurate and comprehensive.

EUR/USD. Bottom. 1.1255. Ranges, 1.1293, 1.1328, 1.1379, Below 1.1193,1.1085, 1.0946, 1.0859. Ranges are compressing as opposed to wide yesterday but derived from topside compression. Target above 1.1443, Failure points 1.1356 and 1.1368. No value in upper 1.1443 target today. Look for shorts 1.1356 – 1.1368. Why no value in upper targets, top today is extreme and uniform throughout. Shorts is the way, don’t look for rises to go anywhere. We want the 1.1255 break to target range 1.1193 and possibly lower. Expect big volatility today, pip ranges 95 long term and 21 short term. Points above 1.1316 and 1.1323 to go higher to target 1.1356 and 1.1368. Caution to longs today.

Brian Twomey, Inside the Currency Market, btwomey.com

EUR/USD. Bottom. 1.1244, 1.1300. Ranges 1.0955, 1.0848 below and 1.1527 and 1.1571 above. Ranges are extremely wide. Range today 64 pips and 28 pips short term. Moderate top today, means EUR has ability to go higher however EUR/USD is dead center range for 3rd consecutive day. Target and big line 1.1357, failure point 1.1352. Further above 1.1378, 1.1392 and descending 1.1433.
Shorts must first clear 1.1305 then 1.1300 to target 1.1244.

Brian Twomey, Inside the Currency Market, btwomey.com

Yellen press conference today after interest rate announcement. Don’t expect Fed Funds to move today. Both headline interest rate at 0.50 and Fed Funds at 0.37 trade comfortably between 8 and 9 year averages. Current positions between 8 and 9 year averages isn’t terrible, its comfortable. Below 8 year averages, 8 tough and rising supports exist. Headline must clear 0.82 from 0.50. Yellen has plenty of operational space but also ability to do nothing. Please Pay no attention to Dot Plots. Its not revealing, imparts zero knowledge, direction. Dot plots lacks purpose and is a distraction.

USD 10Y yield minus 2Y = 0.9873, 10 minus 3 month = 1.61 and OIS 0.014. US 10 V 3 month is to high while 10 minus 2 year is to low. Europe 10 minus 2Y = 0.24.

GDP is positive at 1% and extremely low but Q1 2015 was minus 0.2, and Q1 2014 was minus 2.9. Expect more upbeat Yellen today as Jobs while adding and not up to speed are growing. A dull dire Yellen would raise EUR/USD, upbeat down goes EUR. Why upbeat Yellen is due to positions of Fed Funds. fed Funds is currently balanced which means Yellan should at least give a balanced assessment. That’s a range situation. Balanced Fed Funds means good ranges, correct positioning between 8 and 9 year averages and not overbought nor oversold.

EUR/USD. Range today 61 pips, 27 short term. The top today is moderate which means EUR can travel higher. Big lines for today only are found at 1.1151, 1.1102 and further out 1.1219. All lines are falling. Point at 1.1204 is far out of bounds, look for sells in this area today on any wild Yellen spikes. Targets today are 1.1102 and 1.1100 and 1.1149. Ranges below 1.0868 and 1.0760. Above 1.1332. Ranges overall remain wide as markets are still adjusting to Draghi cuts. This takes time in Europe.

Another day or two for systems.

Brian Twomey, Inside the Currency Market, btwomey.com

Brian Twomey,

AUD/USD last week correlated minus 30% to EUR/USD. This week won’t see big difference. Correlation at 30% means long EUR/USD is short AUD/USD and vice versa. It also means AUD/USD won’t travel far from EUR/USD as the pip differential is about 30 – 40 pips. The same for NZD/USD. Eventually, correlations will change to positive. Possible causes to negative correlations is mis positions between AUD/USD and EUR/USD but a cross rate or two may also be the cause. AUD/NZD could very well be the candidate. The absolute must be analyzed further. Currently my systems are down for the day. I cannot know exactly where the problem lies until I’m fully running. For now, hand calculations.

AUD/USD. Big break point 0.7185. Pip range today 30 pips long term, 23 pips short term and lower point of the differential. Ranges 0.7621, 0.7738 V 0.7469 and 0.7356. Targets 0.7593 failure point and 0.7632. To go higher, breaks 0.7553, 0.7592 and 0.7595. Tough area at 0.7590’s and must breaks to go higher. Look for sells in this area today. To target 0.7469, breaks must occur at 0.7547, 0.7545, 0.7544.

Brian Twomey, Inside the Currency Market, btwomey.com

Since June 2014, Draghi cut to zero then negative 4 times, and 40 basis points in cuts, 30 to count negative alone. This is the same as saying 30% went negative, a bit higher then a 1/4 point cut. This situation is not terrible yet these cuts occurred fast and time must exist to reflect negative cuts in the markets. Currently they are not seen. But this situation will give EUR a slow downward path. Why Draghi said no more cuts is because he will hurt the Swiss, Denmark, Sweden and Norway. The Swiss will be hurt the most, followed by Denmark. Norway will be hurt the least. Japan doesn’t count yet, yet. Both are facing literally zero interest rates which is bottom at the negative point. Negative can only go to 0.0, Swiss and Denmark are close. EUR/DKK is pegged so makes their situation dire due to intervention money spent. Good possibility Denmark cuts again while the Swiss are okay and don’t have a need to move again. The Swiss are actually well positioned as they saw this coming long ago. They were extraordinarily smart. By the way, Negative rates are here to stay for a long, long time in the future. More Central banks will now go negative.

EUR/USD. Correct to say EUR had to break its range in a big way. It cannot handle higher, it must come lower by current metrics but it must come lower by recent cuts. This takes time. How fast must be monitored due to big changes slated for July them must assess what the ECB is up to. I will know in a couple days.

My systems are down for the day so quick assessments here only. Pip ranges today 54 total, 17 pips short term. Targets are 1.1134. Point at 1.1175 is out of bounds. Look for sell here. Big points on the way up 1.1104, 1.1125, 1.1186 is descending. A top remains and its extraordinarily strong. Continue sell rallies. Range point below 1.0764, above 1.1201. Caution, targets and ranges are extremely close but not perfectly accurate as normal.

Brian Twomey, Inside the Currency Market, btwomey.com

I read every word written by Silvio Gesell and negative interest as well as tons of academic papers related to negative interest rates and Gesell theories. Not a word was written regarding negative interest rates and combinations of QE, nor was it a recommendation. QE is a derived policy from the central banks and not Gesell. The ECB way to implement and sustain negative interest is by bond purchases. The 6 central banks adoption of negative interest all use some form of QE to ensure negative interest rates hold. Its a hybrid policy as negative rates by itself I see as a pure supply side approach while QE is pure Keynesian. Together, we have hybrid polices in a two pronged approach. Is further QE needed, is it the way. Will QE see Europe crumble further. 1 year later, Inflation is now negative. Is QE the blame. I always believed negative rates has extraordinary potential. Add QE though and we don’t know because negative rates was never implemented. We are in experimental territory. 2015 saw the fastest interest rate drops among 10 nations and was actually 60% of what was seen from 2008 – 2007. So far Gesell and negative interest rates are working as planned. Draghi has miles of room to further cut if necessary.

EUR/USD. Big vital points. 1.0982 and 1.0910. The pressure continues to build on current prices. Higher EUR/USD goes, greater will be the drop.

EUR/USD. bottoms. 1.0978 and 1.0923. Bottom target 1.0923. Ranges.1.1122 above and 1.0837 and 1.0692. Targets 1.1009 failure point and 1.1011. big points above 1.0982, 1.1000 and 1.1062. Should Draghi drive EUR/USD to 1.1054 then that point is severe overbought, out of bounds type overbought. I expect more dovish commentary from Draghi. Economic risks to downside, Inflation targets extended to whatever 2018 would see EUR/USD drop. Central banks haven’t been near inflation targets since the 2008 crisis. Points on the way up, 1.0982, 1.0998, 1.1000, 1.1003, 1.1009, 1.1010, 1.1017. Sell any rallies as longs are to scary.

Brian Twomey, Inside the Currency Market, btwomey.com

Thank you respectfully Brother Dale Friend of Forex, FXstreet.com, Live Analysis Room for support to recognize my work and efforts.

AUD/USD. Still maintains minus 32% correlation V EUR/USD. This means AUD/USD won’t move pip for pip V EUR/USD but it means a long EUR/USD is a short AUD/USD and vice versa. This correlation mismatch will take time to resolve. When AUD runs higher, EUR/USD drops and it leaves AUD at current way way overbought but also out of range V EUR/USD. AUD/USD currently belongs between 0.7343 – 0.7230. While EUR/USD is now okay between 1.0992 – 1.0954 and then 1.0916. AUD shorts will be a slow grind where 0.7100’s are locked tight.

AUD/USD Big breaks are found at 0.7237, 0.7230 and 0.7158. Bottoms. 0.7479 and 0.7442.Range breaks 0.7380, 0.7357 and 0.7581 above. Targets above 0.7547 and fail point at 0.7516. To go higher, AUD/USD must break 0.7483, 0.7496 and 0.7510. Daily pip ranges are 20 pips. To understand target at 0.7547 and 0.7516, Sell point extreme above is found at 0.7543. This is the sell area. Long point below 0.7321. Then EUR/USD sell point 1.1065 and long 1.0903. Big points EUR/USD 1.0983 and 1.0910. I see EUR/USD cannot hold present ranges despite its current comfort position. I see a massive drop ahead. Any AUD price rises are result of EUR Correlations. AUD longs are scary, better sell the rallies.

AUD/CAD Big vital points 0.9874, 0.9809 and 1.0016

Brian Twomey, Inside the Currency Market, btwomey.com

Mentioned in AUD the negative 40% correlation V EUR/USD. NZD is negative 70% V EUR/USD. Correlations are the main points dragging AUD and NZD higher but its also the constraints on EUR/USD downsides. This correlation dilemma is also forcing AUD and NZD into far overbought territory. For EUR, the more price remains in tight ranges, the greater the pop will be to the downside. EUR has no choice, it must lead this dilemma. To understand currency markets is to understand the self containment of a currency price. No need to ever ever look outside a currency price to find direction, targets, or whatever else all look for outside the currency market cause the answer won’t be found.

EUR/USD V NZD/USD. EUR/USD prices should be between 1.0938 – 1.0876, the big point remains 1.0907. NZD/USD is correct between 0.6682 – 0.6594 with big vital point 0.6638. Further Vital NZD points are found at 0.6628 and 0.6645. I don’t see any movement in OCR when RBNZ meets. The RBNZ signals long in advance when an OCR change is here. Nothing signals a change. Yet to lower OCR is no big deal because OCR is in a terrific spot in relation to its 20 year averages. A 1/4 point up or down in OCR does little for the longer term since OCR is so perfectly positioned. The story for AUD and OCR is the same as NZD OCR.

For AUD/USD and NZD/USD, best to continue to sell rallies because both are so so overbought.

NZD/USD. Bottoms. 0.6767, 0.6750. Ranges, 0.6745, 0.6725 and 0.6705. Above 0.6823 and 0.6843. Targets at 0.6806 and 0.6786 were achieved today. We will see a slow drift downwards until American markets open. Same for AUD/USD. Overall NZD sell point at 0.6628 and long at 0.6670 will work perfectly.

NZD/CAD Big points from current price 0.9083 are located at 0.9146 and 0.9025. If EUR/USD isn’t constraining enough on NZD then NZD/CAD adds to the dilemma.

Brian Twomey, Inside the Currency Market, btwomey.com