As a gauge to determine not only the health of currency markets but risk or non risk contexts. The perfect relationship is found in EUR/JPY, USD/JPY and EUR/USD because all are most widely traded dated to Euro introduction for EUR/USD and EUR/JPY and 2008 for USD/JPY.
EUR/USD is negatively correlated to EUR/JPY and USD/JPY by minus 89% and negative 95% which means USD/JPY correlates to EUR/JPY at 98%. Correlations reveal currency markets are correctly functioning yet in risk off mode. The problem with risk off mode is not found in EUR/JPY or USD/JPy but in EUR/USD because EUR/USD is out of range V both EUR/JPY and USD/JPY. Risk off mode is not exactly functioning perfectly. Perfect risk off mode would see EUR/USD and EUR/JPY falling while USD/JPY shoots higher.
EUR/USD V USD/JPY is most oversold and far out of range from 1.1557. EUR/USD V EUR/JPY is out of range from 1.1350. EUR/JPY is comfortably within range V both EUR/USD and USD/JPY from 122.09 – 124.94. USD/JPY is comfortably within ranges V EUR/JPY and EUR/USD yet at the bottom end from 108.47 – 111.04. EUR/JPY is not the problem pair in the mix rather its the struggle between EUR/USD and USD/JPY. EUR/USD should be higher yet USD/JPY is at bottom ranges but both negatively correlate. In the EUR V USD struggle, one side must win.
USD/JPY. Bottoms are found at 108.47 and 109.34 then next comes 109.76, 110.01, 110.67 and top of the range at 111.04. To look further out, 106.29 is the next big break below while 112.70 and 114.76 are the next big point breaks above. USD/JPY is as much oversold as EUR/USD but not to a great degree. Fundamentally, the BOJ wants USD/JPY higher.
EUR/USD is out of range from 1.1350 V EUR/JPY and current price should be located between 1.1350, 1.1415 and top of the range at 1.1480. The big point breaks below are found at 1.1194 and 1.1075. EUR/USD is oversold but again like USD/JPY not oversold to any great degrees.
EUR/JPY. Bottoms are found at 122.09 and 123.64. A cluster area exists at 123.52, 123.64 and 123.76. Then top of the range points exist at 124.25 and 124.94. To look further out, big point breaks are found at 122.34 below and above at 124.27, 126.10 and 126.61. EUR/JPY direction will be found within the resolution of USD/JPY and EUR/USD. If no resolution occurs and we see more range trading between EUR/USD and USD/JPY then EUR/JPY will join the range trade mix. The strategy is sell the tops and buy the bottoms and don’t look for a long term trade until prices normalize.
Brian Twomey, Inside the Currency Market, btwomey.com