EUR/USD V DXY: Current Prices and Crash Risks
Prior to the 2008 crash, statistical Regression models predicted the move long before in terms of longer term averages from 5 to 8 years. Quite telling a short time frame can predict so perfectly. The EUR/USD V EUR/JPY relationship reached its maximum peaks from monthly but particularly from weekly plateaus. Why early warning is because the EUR/USD and EUR/JPY monthly and weekly relationship was fixed as is always the case in terms of Residual plots. The EUR/USD and USD/JPY relationship was also fixed and boundaries well established pre and post 2008. Not one iota of change in boundaries occurred in USD/JPY V EUR/USD from pre to post 2008 and allowed EUR/JPY to become the signal pair in terms of the big move ahead. No such statistics exist to allow a price to fall outside a plotted boundary.
The monthly DXY V EUR/USD relationship resembles the same similarities seen in the EUR/USD, USD/JPY and EUR/JPY associations. One month before the 2008 crash, EUR/JPY and EUR/USD shared an extraordinary 54 T Score for the weekly and 26 for the monthly.
Current monthly T Scores for the EUR/USD and DXY Residual Plots at the 1 year average are both at 30. The EUR/USD V DXY relationship from averages 4 to 10 years in successive order reveal T Scores range from 17 to 26 and track higher as averages travel higher in years. If monthly 26 T Scores are present then weeklies as the far better forecast of impending problems and big moves are much higher than 26. Consider as well to view DXY in first position as DXY V EUR/USD then monthly averages from 1- 3 years also reveal a deep drop from 30 to 1.68 and 1.26
If monthly average exchange rates alone are factored from 1 – 10 years in successive order then EUR/USD V DXY T Scores range from minus 27 to minus 34 and minus 4 to minus 34 in DXY V EUR/USD. Not only are 1 year residual plot averages a concern at 30 but both DXY and EUR/USD exchange rate averages from 4 – 10 years are not performing and explains why T Scores are high.
What not performing means is the Regression Standard Error as the range indicator and driver of T scores is under severe pressure. When ranges are restricted, T Scores rise and fall as ranges increase. Its an early warning signal to severe price problems exist and big moves are ahead from possibly upper most Peaks, lowest low troughs or it warns a fiscal or monetary phenomenon may trigger the big move. Either way, it warns the big move is ahead and associates to a crisis type move.
For the 2008 crisis, the enormous T Scores experienced in EUR/USD and EUR/JPY saw EUR/USD at 1.6000’s in August 2008 and drop 3 months later to 1.2300’s for a 3700 pip move. EUR/JPY traded 1.69 in August 2008 and dropped 5600 pips 3 months later to 113.00’s. Why the focus on DXY and EUR/USD and why the concern is due because both are not only most widely traded especially USD but the entire world of interest and exchange rates and commodities are affected by either a USD or Euro problem.
The International Standards Organization reveals 56 nations use the Euro as their main currency while 21 nations use the DXY. To correct for the USD imbalance, South America, Asia, Middle East, Canada and Mexico arrange their currency pairs as USD/ Other nation. To understand the SE and T Score relationship is to comprehend restricted ranges since December 2015 particularly from DXY.
Every month since December 2015, DXY and EUR/USD traded between 1 and 2 year monthly averages Secondly, as DXY and EUR/USD prices traded within its averages since December, price pressures every month continued to severely build to the point we see not a trend but a massive breakout. Both DXY and EUR/USD await the impetus to make the big move yet without the catalyst.
The DXY 290 pip June range is found from 96.87 to 93.97. To understand 290, January’s 489 pip range was located from 100.27 to 95.38 while February range expanded to 599 pips from 97.53 to 91.54. February’s bottom dropped. March’s Fed statement stated a lower DXY was ahead from its then current price at 96.17 as the Yellen plan is lower DXY, lower WTI and higher equity prices to raise CPI.
May saw a 438 pip range from 97.12 to 92.74. DXY at 290 is just under half of February’s range and the current orbit is located at its lowest interval since December. Overall, DXY ranged 500 pips from December to June at 99.0 to 94.03 while EUR/USD doubled and traveled 1100 pips from 1.05 to 1.16. DXY is clearly the conundrum and the currency to direct the breakout.
The EUR/USD 967 pip range in February was located from 1 to 2 year averages at 1.0995 to 1.1962 while June’s 462 pip restricted latitude is found from 1.1090 to 1.1552. While 290 DXY and 462 EUR/USD represent distances to averages, actual average ranges between DXY and EUR/USD factor to 166 pips and 192 pips as EUR/USD V DXY. Overall range factors to 200 pips maximum.
June EUR/USD V DXY SE’s in average exchange rates 1 to 10 years range from 2.665 to 1.19 while DXY V EUR/USD range from 0.0439 to 0.0107. T Scores for EUR/USD V DXY range from minus 34 to minus 27 while DXY V EUR/USD travel from minus 4 to minus 34 at the 3 year average. EUR/USD V DXY SE’s in 1 and 2 year averages range from 1.19 to 1.33 while T Scores travel from minus 4 to minus 17 and minus 34 at the 3 year average. DXY V EUR/USD SE’s range from 0.0215 to 0.0107 and T Scores Minus 4 to minus 17 and minus 34 at the 3 year average.
Not only are range restrictions seen in exchange rates to cause Standard Errors and T Scores to achieve alarmingly astronomical levels but the same phenomemon is experienced in Residual Plots. Correlations in exchange rates from monthly averages 1 to 10 years calculate to upper negative 90% yet residual plot averages from 1 to 3 years for DXY V EUR/USD run + 99%, + 33% and +21%. EUR/USD V DXY in 1 to 3 year averages factor + 99%, + 86% and +78%.
What is seen in range restrictions, SE’s, T Scores and correlations is the variations in current prices between EUR/USD and DXY reached extremes and formed tortuous clashes against each other’s prices. One side must win while the other side must lose which means DXY or EUR/USD must go far lower or far higher against each other. The attributable variations currently seen are the types of deviations to see a fundamental economic event to cause a price explosion such as was experienced in 2008. More fundamentally, price is as much about location as much as the relationship between each other. The location of EUR/USD and DXY cannot remain in current ranges as the marriage of variations must experience a divorce or at least a separation.
The great Statistician George Box and famed for Box – Jenkins and Box- Cox Transformations stated ” all models are wrong but some are useful”. When Standard Errors underperform and T Scores rise then not only is the big move ahead a warning but the further admonition is the current models are seriously deficient in exchange rates and residual plots as both Standard Errors and T Scores reveal EUR/USD and DXY could easily fly higher but the price construction and design between both won’t allow such an occurrence. The derivation of the current exchange rate situation is found in the June 2015 introduction of the new Fed Facility in Overnight Repurchase Agreements.
Two vital points to the Fed’s monetary policy is raise and support Fed Funds. Rather than allow Fed Funds to rise and free float, the Fed created the Overnight Reverse Repo Facility to support Fed Funds rises. Current Repo rates trade between the buy side at 0.20 and sell side at 0.25. The Fed raised Fed Funds to now trade 1/4 point between 0.25 and 0.50 with a mid point at 0.37. Only two days since December 17 has Fed Funds not closed between 0.36 – 0.38. When the Fed rescinded past statements to lower the Balance sheet, Treasury securities were reinvested at 0.25 and 0.25 served as a solid floor to Fed Funds.
The 1/4 point range in Fed Funds not only caused Fed Funds to become seriously overbought but DXY prices became affected by the 1/4 point latitude. Viewed from 1 month Commercial Paper Financial and Non Financial rates, 1 month Euro deposits, overnight to 3 month Libor and Treasury yields from 90 and 180 days then the entire short term system of Fed interest rates trade between a stunningly tight 1/4 point range. If short term interest rates trade between 1/4 point for six continuous months then all nations exchange, interest rates and market prices trade in tight ranges. The Fed and Yellen is not only responsible for the current situation but they are also compelled to break the deadlock.
Brian Twomey, Inside the Currency Market, btwomey.com