AUD/USD and the Yield Curve

AUD/USD for many many weeks experienced severe range compression. Today’s daily range is 16 pips and 10 pips viewed from monthlies. Not much difference from two weeks ago at 15 and 10. Nor does much difference exists in AUD’s overbought yield curve yet nothing changed in two weeks in the yield curve as well as the exchange rate. Australia’s interest rates, yields and swap rates literally far surpass, literally tower over the US, UK, Germany, Canada, France, Italy, Japan, Swiss. Its understood why Big Glenn Stevens always delivers rosy scenario speeches since AUD is held inside a tight noose. AUD 10 year yield at 2.83 for example surpasses the US at 2.22, UK at 1.81, Germany at 0.46, Italy at 1.4, France at 0.77, Japan at 0.31, Swiss at negative 0.35. Only NZD beats AUD at 3.53.
Australia’s problem is its Current Account deficit which rose 41% from 5,532 million to 19,033 and a goods and services deficit rise 102% from 4,860 million to 9,641 million. Exports fell 4,816 million, 6% and imports rose 44 million. Australia is purchasing more foreign goods and services than purchases of foreigners buying Australia’s own goods and services. The other side of the equations is Foreign Direct Investment into Australia remains extraordinarily high. Investment and earnings from Australia’s high interest rates is attractive. A Current Account may show deficit but the Capital Account is in surplus based on high FDI. Big Glenn Stevens in a 2013 speech points to Terms of Trade as the primary economic driver for AUD/USD as AUD moves and is valued by Terms of Trade.
Seen in AUD is the NZD strategy by maintaining yields higher than other nations especially the G10.

AUD/USD has a bottom at 0.7150. To go higher, 0.7242 must break. Below big point breaks are found at 0.7169, 0.7187, 0.7194, 0.7190, 0.7174. Why so many points? Cause AUD ranges are deeply deeply tight. Deeply tight ranges has been the case for many months now and its expected to continue. The best target above is found at 0.7205 and way below 0.7242. The best AUD/USD can see over time is 0.7400’s but I wouldn’t entertain this thought. Wespac Bank is long AUD to 0.7350, good luck. I wouldn’t do it.
AUD will again see its day for the big trend but its not here now. Consider AUD reached 1.1097 in July 2011 then broke 0.9500 May 2013, now 0.71. In 1920, AUD/USD was 2.400. Consider AUD began to Free Float in 1983 and reached 0.9600. The lowest seen since the 1970’s was during the 2008 crisis at 0.5700’s. Then the RBA intervened. AUD will make the big moves when Australia data dictates. I don’t see the same rosy scenario as Big Glenn Stevens and I favor the sell rallies approach. AUD/USD is heading lower but it will take time.

ECB Deposit Rates and the Two Tiered System

The EURO introduction in 1999 meant a complete revamp of not only the European system but a complete overhaul of the banking system. Prior to 1999, Europe had `16 separate and sovereign countries, 16 separate Libor Rates, 16 separate overnight and interest rates, 16 separate currencies. Each bank in each nation functioned according to their own money and money supplies. To align the European system as one under the Euro, three main interest rates were introduced to govern the Euro money supply system inside Europe and align bank operations: Eonia, Main Refinance Operations and the Marginal lending Facility. The two most important interest rates are Eonia and the Main Refinance Rate. The three rates as a whole would later be termed in academic literature a corridor system of interest rates and would mirror the same corridor system as most other nations.
The purpose of a corridor system of interest rates is to steer, to direct, to channel the money supply inside a small corridor of interest rates and its directed by either the ECB in Europe or respective central bank because central banks have ability by law to set interest rates at pertinent levels. The ECB is only in charge to change the Main Refinance Rate. The corridor system is a protection to ensure the central bank doesn’t lose control over the supply of money. EURO Libor would govern London Money markets.

When the EURO was introduced, Dutch Gilders, Austrian Schillings, German Marks, Italian Lira’s, Greek Drachmas and other currencies were placed on deposit at the ECB and exchanged for Euros. To ensure the new mad rush of money supplies would not wack out the system, the ECB set Eonia at 2.75, MRO at 3.00 and the Marginal Lending Facility at 3.25. The entire spread was 50 basis points and quite narrow yet channeled purposefully into the small corridor. From 2000 to 2008, ECB policy was spreads from Eonia to the Marginal Lending Facility would be 200 basis points wide. The system would look like this Eonia 2.75 Refinance Rate 3.75, Marginal Lending Facility 4.75. As the ECB adjusted the Main Refinance rate up or down, Eonia and the Marginal Lending Facility would soon follow and adjust as the market determines since both are complete market instruments.

From 2008 to present day, the ECB adjusted the Corridor to 100 basis points but since 2009, the ECB cut the Refinance Rate from 2.50 December 2009 to current 0.05. The corridor on Main Refinance Rate cuts were actually found from 75 basis points to as high as 250 basis points. Since September 2014 and negative Eonia rates, the Corridor has been 50 basis points wide.

The purpose for the ECB to go negative was to force money into the open market to settle rather than place money on deposit at the ECB. The ECB went negative on Eonia to create a penalty rate to force Europe’s 5,000 banks to deal with each other in the open market and force competitiveness rather than settle accounts at the ECB. The idea for the ECB was to eliminate its cost to handle money. An example. End of day Bank A has a deficit of 10 million Euros but Bank B has a surplus of 10 million Euros. Eonia Friday was 0.86 in the open market yet the ECB offered Euros at 0.80 while Libor offered Euros at 0.81. Not one location along the yield or interest rate curve Friday could Euros be purchased at 0.80 Eonia. So the channel to buy and sell Euros Friday was 0.80 – 0.86, 6 basis points wide. My view is this 6 basis point channel compresses further, targets a lower for longer EUR/USD yet kills volatility in the future.

The 2 tiered system would add another penalty interest rate between Eonia and the Main Refinance Rate. The penalty rate however is not for retail customers but rather steered to banks so to not park excess money at the ECB. The ECB is trying to be the lender of last resort not the first. The corridor would yet again compress. I quote Danske Bank to offer Eonia trades about EUR 10 billion daily, 2% of the 530 billion EUR excess liquidity in the banking system daily. The SNB to offer a counter example has a spread of 10 basis points from Saron and CHF Libor and within an overall range from 0.25 – 1.25 or 100 basis points. Denmark has about 50 basis point wide differentiation between CITA and the CD rate but 75 basis points overall inside the channel. Friday the spread was 29 basis points.

I offer the basics overall in this writing but the EUR system looks like this currently

Libor Eonia Main Refinance Rate Marginal Lending Facility, the new possible proposal

Libor Eonia New Interest Rate Main Refinance Rate Marginal Lending

Dansk Bank outlines a scenario how the ECB can easily offer further QE as well as a further 20 basis point Eonia cut. The two tiered system is yet again another Keynesian approach to allow central banks full market control, its a defensive move and far from the basic premise of central banks since its 1913 founding to add or subtract money to the system and guide that addition and subtraction based on interest rates. Note money first and interest rate secondary not interest rates first. Money creation or subtraction guides interest rates. Today and the shift to Keynes is interest rates first, money secondary.

Why now for the Two Tiered System is possibly because the US introduces another interest rate in Q 1 2016. Our markets will change and enter a new period as all central banks will match the traditional fire and ice relationship between the US and Europe. Its not good nor healthy economically but

G 10 Week of November 23rd

The commonality in our currency pairs particularly EUR/USD, GBP/USD, AUD/USD and NZD/USD is significant tops are here yet our pairs are oversold intra and multi day. Corrections could be seen yet corrections aren’t going anywhere. We remain in sell rally mode. Monday PMI’s for USD and the Eurozone follows Tuesday’s GDP for the Eurozone and USD. I will run the USD data but based on last report when a dip was forecast, 1.8 should be oversold so look for higher GDP for USD. Big Glenn Stevens from the RBA speaks Tuesday. I have enormous respect for Big Glenn Stevens, comments will be monitored Particularly as NZD/USD and AUD/USD are truly at important support points. The big economic release for NZD will be Wednesday’s Import/Export prices. A good release could send NZD higher as Imports / Exports are tied to NZD’s overall problem in Trade ables Vs Non Trade ables. A correct Import / Export release could mean Trade Ables Vs Non gaps are closing. This is bullish NZD.

GBP/USD. GBP is on the verge of a breakout lower. The big lines above to go long is 1.5302 and 1.5389. For now its sell rallies. Intraday, 1.5202 will dynamically move for the next few days. GBP range is 21 pips. Doesn’t say big moves ahead but rather more slow price movements. GBP top is not significant yet and it can easily handle a price rise.

NZD/USD. Range 21 pips. Big lines above 0.6555, 0.6563, 0.6585, 0.6588. Above 0.6588 then next 0.6628. Daily bottom for Monday 0.6526, Overall big Bottom 0.5772. Daily targets 0.6543 and 0.6577. A significant top is here for NZD as its oversold intra day. Sell rallies is the way.

AUD/USD. Note AUD closed 0.7233. Why?. Cause big line breaks intraday 0.7234, 0.7224 below and Bottom found at 0.7198 and big break below 0.7176. A significant top is here for AUD but its a rangy trap as current range is 15 pips. Intraday targets found at 0.7252, 0.7256, then 0.7275 and 0.7279. Overall trend for AUD/USD is lower as long as 0.7822 holds.Intrday, continue to sell rallies into the future.

EUR/USD. Any price rises remains a sell. Quite significant peaks are here and EUR/USD is heading far lower. As well it will remain the leader Vs AUD, NZD and GBP. The intraday range is 44 pips and again EUR/USD is the pair to trade. The line at 1.0710 is moving down on current prices. Despite a peak, EUR/USD Intraday is oversold and could see a rise. Price rises are gifts and meant to sell.

EUR/JPY. As mentioned many times, 132.56 broke lower then 131.46. Now price sits at 130.70. EUR/JPY is heading far lower. Next big support exists at 127. Shorts and sell rallies below 131.46. A break higher of 131.46 doesn’t mean EUR/JPY heads significantly higher. Its a short just beginning below 131.46.

Many more pairs coming here today.

Brian Twomey, Inside the Currency Market, btwomey.com

Fed Statement:

Janet Yellen’s big question is how can the Fed continue to reinvest T Bonds, Raise Fed Funds and ensure a good economy. After reading 10 single spaced pages in the statement, my summation is the Fed wants to raise yet also wants to maintain a high balance sheet as protection against a Fed Funds hike. Yellen prefers both ways, high balance sheet and raise Fed Funds. But then the economy question persists. How can an economy maintain an upward trajectory under a high balance sheet. How can interest rates continue to rise under a high balance sheet. The problem is not raising Fed Funds or the economy but its the high balance sheet. A high balance sheet and interest rate rises fails to travel together. A high balance sheet and stimulus is why Fed Funds remain at practically zero. Yellen must eliminate the balance sheet by not reinvesting in T Bonds and allow the Fed Funds rise and economy to perform its functions. it will, it always does as the economy based on the statement is doing just fine. But Yellen is a Keynesian, apt to experiments and wishes to find a method to have her cake. She thought she found it in the new Repo Rate experiments but Fed Funds at 0.13 from 0.06 when she started the Repo program says yet again another experiment / tool failed. If the central bankers would just get back to basic economics, all would be fine. I see the Fed Funds rise coming but under a high balance sheet, the Fed could easily remain at one and done for quite some time.

The Fed is beginning to speak about a topic I’ve written about extensively, the natural Rate of Interest. Knut Wiksell believed in 1898 an economy operates based on its natural rate of interest. The natural rate is found between 20 – 50 year averages. This is r found in all economic models. Last I checked, the 25 year average is found at about 1.5 Fed Funds. We are at 0.13 and economically under performing overall. The Fed’s question in my estimation is at what point does Fed Funds rises become terminal or where does rises stop in light of continual high balance sheets. Yellen is finally telling us the degree of her Keynesian loyalty as they must look at the old Keynesian IS / LM Models last employed in the 1990’s by central banks and highlighted extensively in my book Inside the Currency Market. The interest rate vs Money Supply plots vs investment and Savings. At some point on the plot, equilibrium is found. Equilibrium would be found the Terminal interest rate, GDP and targets.

The Fed from the statement is looking at OIS rates, Libor minus Fed Funds. OIS stands at 0.0010, fed funds at current 0.13 or 0.0013. Life for Yellen’s raise is not looking very good until we see OIS turning higher.

Again the DXY comments. A high DXY says the Fed won’t see Inflation meet the 2% target. But remember this statement is 1 month old and its essentially old news. PCE hit 2% target at a 99.00 DXY, another losing argument for Big Sis Yellen.

Imagine Savers under a Fed Funds rise. Savers haven’t existed in 7 years, almost 8.

Brian Twomey, Inside the Currency Market, btwomey.com

Etymology of ISIS, ISIL

ISIS, Islamic State in Iraq and Syria or as America’s Obummer states ISIL to mean Islamic State in Levant. The difference is the original ISIL, Levant, includes the lands of Israel. The ISIL term is known in Arabic as Daesh or Ad Dawlah Al-Islamiya Iraq Washams. Secretary Kerry stated in Paris today Daish which if I heard correctly is the derogatory form of the ISIS term in Arabic.
ISIS is a Salafi group born of the Wahhabi tradition from Saudi Arabia. Why Saudi Arabia is because Muhammad founded Islam as Capital in Medina Saudi Arabia in the 6th century. What followed were caliphs or religious and political leaders beginning in the 7th century with Rasidun Caliphs. What split the Caliphs and Islam in particular was the division between Muhammad and Son in Law Ali. Followers of Ali became Shia and formed Caliphates based on Heredity while Sunni followers of Muhammad elected Caliphs.The term Caliph conveys a successor to God and Commander of Believers. Caliphates existed under dynasties until Mustafa Kemal under the Ottomans abolished Caliphates and formed the secular nation known today as Turkey. ISIS both despises Turkey for not only its secular positions but abandonment of the Caliphates. Kuwait, not necessarily a Caliphate was founded by the Sabah family in 1766 and still rules today. Oman was born from Family rule, UAE by Sheiks.
ISIS despises Turkey for far greater reasons as Italy under the Byzantines ruled Constantinople. Constantinople was part of the original Residun Caliphate that had at its intention to form one large Calipate under which all Muslimes would live. Eventually the Orthodox Christians would set up camp in Constantinople until the Ottomans forced the orthodox to set up shop in Russia then Crimea.
The leader of the Rasidun Caliphate was Abu Bakr, the same name taken as today’s ISIS leader. He harks back to establish the Rasidun Caliphate that included lands from Saudi Arabia, to North Africa, the Gulf states and included Syria, israel, Libya, Egypt. Its seen as religious land because it was granted from Muhammad through God. What changed since 632 and the beginning of the Rasidun Caliphate was Arab Dynasties separated, split, fought against each other, fought Christians. Wars were fought predominantly for land, religious reasons and power control to include the Arab dynasties. Arab land since Rasidun has territory control and won’t allow sharing with Christians, Jews or Orthodox.
Muslims ruled Spain in the Iberian Peninsula from 711 – 1011 until the Christians under Spain, Portuguese and French armies later defeated the Moor Muslims. Here began the long Christian tradition. Why the ISIS attack against the French today is because the French were involved in the fight but more importantly the Catholic church was located in Avignon in southern France. Pope Urban and Pope Clement 1 were involved in the fights to defend Christian lands. ISIS remembers and holds the French accountable. Russia is accountable for the Orthodox in Constantinople.

What split Arab lands was Sykes Pico, the WW agreement by the French and the UK. Helps us fight said the French and Brits and we will restore your lands. The Arabs fought but lands were separated to form states rather than the promised Caliphate. Iraq and Syria were divided as separate states, Gulf states found oil so Arabs states subdivided into rich and poor. Sunni staes formed V Shia states such as Iran. Followers of Muhammad or Sunni’s are by far the majority Arabs Vs Shia.

ISIS flies the Black flag which is the black flag of Muhammad. its a Battle Flag with a gold ring that says No God but Allah. Dabiq Syria is not only the capital of ISIS but its Dabiq where the ISIS Jihad magazine is published. Dabiq is the location of the famous battle of Marh Dabiq where the Ottomans fought and defeated the Sultanate of Mamluk in 1516 and later led to the 300 year rise of the Ottoman Empire. In Dabiq is where ISIS believes they will fight against the Christian armies and win to then declare the beginning of the end of the world. Further as stated in the Hadith, Dabiq is found a possible location for the Christian apocalypse, Malahim in Arabic. ISIS today states the Christian army as Rome or the Battle of Rome.

Does ISIS seek the return of the 12th Imam, now hidden in occultation, the person to come to the world to bring peace and justice. I don’t know yet but all past 11 Imans were poisoned and most imprisoned.

Send immigrants through the Mediterranean to France, Germany and Greece from an ISIS stronghold in Libya then ISIS has ability to continually send immigrants. Europe is in a box, packed between ISIS and immigrants to the south and Russia to the north. A strategic nightmare as Russia has funded the French le Pen far right Party as well as Greece Golden Dawn and Hitler nationalist parties in Germany.

NZD: How NZD Trades in Markets

The reason why no two currency pairs are the same is because no two economic systems are the same. NZD and AUD appear to be brothers locked at the hip when in reality both are more like far distant cousins because each nation operates two distinct economic systems for vastly different reasons. NZD bond yields are always higher than most counterpart nations because New Zealand spends more than it saves traditionally.
Bond yields are priced higher purposefully to contain Inflation as New Zealand joined the ranks of Sweden, UK and other nations in 1990 to Target Inflation. NZD 10 year bond yield for example over the past 20 years traded anywhere from 0 – 300 Basis points above USD equivalents. Since 1990, NZD 10 year yield traded 0- 120 basis points above Australia 10 year yields. 10 year yields dropped over the past 20 years because Inflation dropped. To further protect its system, the New Zealand Debt Management Office issues Inflation Indexed bonds to monitor future Inflation. New Zealand Bonds are not only popular with foreign investors because interest is exempt but NZ bonds pay more than other nations to ensure the New Zealand system replicates itself and maintains its economic status. As of February 2014, 64% of NZ bonds are held by foreign investors. Over the past 10 years, bonds held by foreign investors ranged from 50% to 77%. Since 2012, the DMO now offers bonds on an advanced forecast Quarterly schedule rather than its prior method to issue bonds based on maturity and market demands. This changed the dynamics to NZD.

Due to NZD’s equalization in bonds and its known issuance on a quarterly schedule, NZD becomes easier as a management tool. What this means is containment for NZD and NZD currency pairs. AUD is an interest rate currency while NZD shares a hybrid relationship with its interest rates and yields. Its hybrid status allows NZD wider ranges but it also allows NZD not to become a hostage to world vagaries since its currency is purposefully priced at a 0 point.

NZD must be traded based on monthly averages because Bottoms are not seen on a daily view and it includes NZD/USD, NZD/JPY, NZD/CHF and NZD/CAD. But the monthly view allows longer holding periods as opposed to counterpart pairs because bottoms are known. Its the tightness of exchange rates to interest rates that prevents the bottom view from a daily perspective. What is seen from a daily view is longs only. Consider why NZD is never seen from severe overbought / Oversold perspectives long, medium and short term. Yet NZD movements are always reported in percentages and always NZD outperforms other currency pairs movement. Reason for out performance is wider ranges built into the NZD system. It doubles EUR/USD for example. But its the wider ranges built into the system as reason why NZD never reaches extreme prices or extreme overbought /oversold.

Brian Twomey Inside the Currency Market, btwomey.com

Gold / Silver Ratio: EUR/USD, GOLD, Silver Forecasts

The Gold/Silver Ratio as a preeminent indicator to overbought/ oversold Gold, Silver and both Gold Vs Silver closed at 74.01. The 80.07 highs from 1- 5 years on a break targets the next 10 – 20 year historic point at 83.85. The highest price seen since 1915 was 97.31 July 1941 and 93.33 November 1990. Historic lows since 1915 are found in July 1968 at 19.00’s and 19.22 July 1968. Lows at 32.00’s occurred in 1975 and 2011. The 1 and 2 year range is found between 80.07 – 69.32 and 60.20, 60 day range between 77.86 – 71.42 and 30 day from 74.39 – 71.42. The 24 hour range is located between 74.40 – 73.60 and the average of the historic range from MA’s between 1 -25 years is 33.64.

What drives the Gold/ Silver Ratio is a positive correlation to Gold and negative correlation to both Silver and EUR/USD. Silver negatively correlates from 1 – 7 year averages between minus 88%- minus 97% and barely above negative 50% in averages from 10 – 25 years. EUR/USD negatively correlates from 1- 7 year averages between minus 0.08% to minus 74% and remains below minus 50% in averages 10 – 25 years. Gold is positive throughout all averages. The Gold and Silver price on its own volition correlates to each other in averages from 1 – 25 years from positive 87% – 98%. Gold drives the Gold /Silver ratio but Gold is severely overbought while Silver is way oversold.

What drives Silver in the Gold / Silver ratio are averages 2, 3, 5, 7 then 1 year. What drives EUR/USD in the Gold / Silver Ratio are averages 2, 3, 5 then 7 year. EUR/USD vs Silver by themselves are driven specifically by the 2 year average in a 90% correlation. Next averages, 3, 5, 15 and 20 are barely above positive 50%. EUR/USD Vs Gold by themselves are driven by the 2 year average at 82$ then the 20 year at 60%, 15 year at 57%, 25 year at 52. Overall, EUR/USD more closely aligns with Gold than Silver. The polemic with the EUR/USD relationship is the Gold/Silver Ratio is overbought, Gold and Silver prices by themselves are all oversold yet below respective averages and EUR trades far below its 25 year average. Its a monetary policy phenomenon rather than technical driving current relationships. If the Gold/Silver Ratio is viewed from averages 1-5 then the average range move is 21.31 and seen from averages 1 -7 years then the average becomes 26.01. A significant move on Gold and Silver could easily be seen in development stages.

Gold Silver Ratio must break the 1 year average at 73.60 below from the 74.01 close to target the 2 year average at 69.16 and 3 year average at 65.49. Below 65.49 then the Gold/Silver ratio faces solid supports at 61.26, 61.18 and 61.07. The 10, 15 and 20 year averages at 58.96, 61.07 and 61.26 become overbought on price rises. Averages from 3 – 20 year are all overbought. Targets from 1 – 25 year averages are located at 74.86, 74.05, 72.47, 71.07 and 70.50. Targets above include recent highs at 74.39 and 77.86.

Gold from 1088.90 trades below averages between 1- 10 years and above the 15, 20 and 25. Price must first break the 10 year average at 1135.35 and 1 year average at 1179.46 to target 1228.26, the 2 year average. Above 1228.26 then next averages are found at 1314.56 and 1318.46, the 3 and 7 year averages. Targets include 1063.06, 1113.85, 1138.36, 1152.30, 1165.14, 1211.68, 1221.92.

Silver from 14.72 is below averages from 1 – 15 years and above the 20 and 25 year at 12.61 and 10.99. To head higher Silver must break the 15 year average at 15.09, the 1 year at 16.03, 2 year at 17.89, 10 year at 19.92 and 3 year at 20.56. Targets from lowest to highest, 5.57, 11.82, 14.78, 15.24, 15.59, 15.77, 17.83 and 19.92.

Brian Twomey, Inside the Currency Market, btwomey.com

EUR/USD: Yellen Raise or No Raise

Non Farm Payroll job gains at 273 was significant enough in my estimation for Yellen to raise Fed Funds. What would the EUR/USD look like under such a 25% hike scenario to 50% based on headline benchmark differentials.

Viewed from 1.0850 under current differentials, range lines are found from 1.0321 – 1.1948, then 1.1134 becomes the vital point to beat above. Viewed from a Fed Funds rise, ranges substantially increase to 1.3064 – 1.1477 with an average line at 1.2270.

Viewed from 1.0750 under current differentials, range lines become 1.1287 – 0.915, an average line at 1.0218. Under a Fed Funds rise, the average line becomes 1.1696 as again ranges substantially increase from 1.3975 – 0.9417.

From Fed Funds at today’s 0.12 close then from 1.0850 range becomes 0.9982 – 0.9065, an average line at 0.9523. Under a positive Eonia then the ranges expand with an average line at 1.1469.

From 1.0750, a positive Eonia average line is found at 1.1363 and normal circumstances the range becomes 0.9890 -0.8965, an average line at 0.9427.

Fed Funds traded today at 0.35 so from 1.0850 the range becomes 1.2477 – 0.9364, an average line at 1.0920. positive Eonia average line becomes 1.2368.

From 1.0750, the range becomes 1.2362 – 0.9259, an average line at 1.0815. From positive Eonia, the average line becomes 1.2254.

Yellen Fed Funds rise would substantially expand trading ranges yet EUR/USD ranges would drop much further.

Brian Twomey, Inside the Currency market, btwomey.com

From 1.0750,

From 1.0750

From 1.0750 then

Non Farm Payroll Forecast

Non Farm Payrolls since the 1939 program inception traditionally encompasses in monthly releases a 50,000 job gain or loss range. Certain months deviate such as the next OCT release where is found a 93,000 range. But ranges are found based on consensus forecasts. This month forecast is 180,000 which means the range is 273,000 above and 87,000 below. Consensus forecasts are found at a various Median line usually the 5 year average. The problem with the next forecast and range is 180 as a consensus is not found within 20 years of data and the 93,000 range is far to wide. The best range is found between the 5 and 20 year averages at 201.30 above, 102.35 below and a 151.82 Median. The traditional release is then properly aligned at 49,000

The data dated from 1- 20 years says job gains go higher. A break of 201.30 faces next major points at 203,000, 220,000, 222, 225 and 231. Minor points are found at 145.90, 152.90 and 165. As a release, Non farm job gains are oversold particularly at the 7, 10, 15 and 20 year averages. Shorter averages from 1- 5 years are also oversold yet all face tough resistance from 201 – 231. A break is required to go higher.

Targets short term are found at 146.98, 159.35, 151.37 and 124.46. Longer term targets are found from 288.92 – 356.67. What I’m looking for are job gains between 151.82 -201.35 to ensure probable further gains later to break resistance between 201.30 – 231.

Brian Twomey, Inside the Currency Market, btwomey.com

US Employment Rate: 1948 – Present

The unemployment rate was released by the Bureau of Labor Statistics in January 1948 at 3.4% and ranged between 1948 to 1965 between 2.5% lows to highs at 7.5%, a 5 point range. Highs at 7.5 were anomalies as 39 months of 200 saw the unemployment rate above 6%. The period from 1965 – present day not only saw a doubling of the range to 10 points but 7.5 highs were broken in the 1970’s to reach 9.0%. On a Trimmed mean basis, the actual 67 year range is 6.13. The 67 year mid point from 10.8 highs to 2.5 lows is located at 6.65, the 50 year at 6.95 and 30 year at 6.8.

The current 5.1 unemployment rate held through September and October Non Farm payroll releases. The number above to beat is the 1 and 2 year averages located at 5.45 and 5.96. The supports below are found at 4.83 and 4.80. Above 5.9 then next comes 6.0, 6.1 and the various degrees of 6.0’s. Of the 12 outlined averages dated to 67 years, the vast majority are found from 6.0 to the misplaced 5 year average at 7.3.

What drives the unemployment rate is the 1, 2, 3 and 5 year averages. All are not only oversold and experience more oversold on rate drops but targets factor to a higher rate. Short term targets begin at 5.0, 5.24, 5.37, 5.58 and 6.09. Longer term averages are middle range and reveal the unemployment rate heads lower over time. Any rises in the unemployment rate represents an oversold correction in a far larger downtrend. Consider exactly 5 years ago, the unemployment rate was 9.4 and embarked on a steady downtrend to current 5.1%. The last time 5.1 was seen was 91 months ago or 7.58 years.

The unemployment rate and associated averages are slow movers yet it trends. When 6.1 broke 14 months ago, the unemployment rate saw 13 months of 5.0 drifts to 5.1, 9 months of 6.0’s and 10 months of 7.0’s. Typically throughout its 67 year history, the unemployment rate will hold for example in the 6.0’s for 1 -2 years then break to either 7.0’s or 5.0’d and hold for the next 1- 2 years. What is expected in the unemployment rate is slow movements and slow deviations in the 5.0’s.

Brian Twomey, Inside the Currency Market, btwomey.com

GBP/USD Correlations

GBP/USD under performance Vs EUR/USD and tight ranges is attributable to correlations in relation to counterpart pairs. GBP/EUR is a vital pair in the GBP universe yet it correlates to GBP/USD 0.11%. GBP/JPY is the best correlation at 77% followed by GBP/NZD at 30%. Even GBP/CAD, the “Carney Cross” negatively correlates at minus 0.02%. GBP/AUD and GBP/CHF further follow negative correlations at minus 0.07% and minus 0.27%. GBP/SEK is positive 0.28% yet GBP/NOK and GBP/ZAR shares negative correlations at minus 0.02% and minus 28%. Of 10 pairs, 4 are positive and 6 negative. Of the positive correlations, 3 pairs are weak and far below 50& while GBP/JPY remains strong at 77%.

EUR/USD: More Downside

Why continued focus on EUR is because GBP has been literally stuck in dead ranges and has severely under performed EUR. Secondly, GBP ranges no longer can hold and I’m expecting a range explosion to the downside. What’s inside the current GBP price is pure noise.

Last week break on Draghi comments of 1.1236 and 1.1155 remains stasis at 1.1155 as 1.1236 crossed below 1.1155 and is now located at 1.1143. Also mentioned last week was the point at 1.0895 was a must break line to see the bottom at 1.0672. The level at 1.0895 moved higher and is now located at 1.0903. The bottom at 1.0672 is now located at 1.0512 and 1.0459.

Shorts must remain below falling 1.1143 and immovable 1.1155 to target the dynamic moving line now at 1.0903. A break of 1.0903 targets not only 1.0788 and 1.0775 but breaks here should see bottoms at 1.0512 and 1.0459. The range is found between dynamic lines at 1.0903 – 1.1143 and 1.1155.

Longs must break 1.1155 to target dynamic lines at 1.1275, 1.1288 and falling lines at 1.1594, 1.1598 and 1.1699.

Despite a severely oversold EUR/USD and a 2900 pip drop in 14 months, the economics of Europe and a Yellen raise are still grounds to continue focus on the downside. In terms of MA lines, the entire structure still reveals short as lines continue to descend. A full directional price change can only occur if Yellen rescinds a Fed Funds rate rise.

Brian Twomey

US Vs German Yield Curve, Deposit Rates and EUR/USD

When EUR/USD last traded 1.0465 April 2015, the German yield curve was negative up to the 9 year yield and appeared to be trading below the deposit rate. German yields 1- 8 years viewed from a negative perspective is actually minus 0.119 but annualized then yields still remain far above the deposit rate at 0.88. The same interpretation can be seen in the European interest rate curve as minus 0.0515 transformed is actually 0.94 and again far above the deposit rate.

What’s striking is the German yield curve from 1- 10 annualized at 0.77 trades below the deposit curve and correlates 0.20 Vs the corresponding US 1- 10 year yield curve at 1.28, a difference of 0.51 from the six corresponding points. What explains the low Correlation and deviation is German Vs US swap rates at the 1 year yield remains positive 0.355 on the German side and negative 0.355 on the US side. German minus US and US minus German reveal a swap range between + 0.77 and Minus 0.77. If German yields are viewed in its entirety from 1 -10 then yields sit dead on the deposit rate. A break takes price to 0.75 as the range holds at 0.84. A break further determines if EUR/USD achieves the current yield forecast bottoms at 1.0512 and 1.0459. The 10 – 30 portion of the curve determines the EUR fate.

The 1- 30 German yield curve from 0.8748 again trades above the deposit rate and correlates vs the 1.65 US yield curve at 0.65, a difference of 0.77. The 10 – 30 drives both the German and USD yields as the correlation is 95%. The German mean at 0.96 vs USD at 2.55 reveal a spread of 1.59. The 1- 30 German range is 1.60 and 1.56 from swap rates between 1- 10 year.

Not only is EUR/USD at an important inflection point but the German curve is also at a critical juncture. If Yellen remains on hold, Draghi and the ECB may very well lower the Deposit rate. If Yellen raises then the work for Draghi will be done as the US spreads will widen Vs the Germans and should see a far drop for the EUR.

Brian Twomey, Inside the Currency Market, btwomey.com