The preeminent explanation in currency markets and Realignment in particular is to view GBP/USD, USD/JPY and GBP/JPY. In USD/JPY and GBP/JPY, 1 year Correlations run +98% while GBP/USD V GBP/JPY +97% and +90% in USD/JPY V GBP/USD.
Currency market prices are severely imbalanced under a present Correlation scenario and the current situation not only lacks ability to hold but significant moves are ahead as Correlations must align properly. The main question is who will own the JPY cross pairs. In a continued risk off environment such as our present post 2008 framework then USD/JPY will own the cross pairs and EUR/USD and GBP/USD heads lower. If GBP/USD owns GBP/JPY then both head significantly higher and USD/JPY drops far lower to break 100.01 and 99.76. USD/JPY or GBP/USD must win control of GBP/JPY to determine the next or continued market phase.
Pre Brexit, GBP/USD and GBP/JPY correlated as high as +90% then +60 % just prior to GBP’s massive fall. GBP/USD, USD/JPY and GBP/JPY massive Brexit drop forced a new Correlational marriage among all 3 pairs yet a divorce is imminent and the Phoenix must emerge.
The first clue is USD/JPY is on the verge of a huge break at 103.74 while GBP/USD and all its cross pairs trade below 10 year averages. This situation cannot remain and its why Currency markets are headed for absolutely wonderful volatility especially all GBP pairs as not only Realignment must work its way through market prices but significant break points must be seen to complete Realignment.
Why an abstract, litle known and rarely seen scenario such as Realignment is important to traders is because as 1998 and 2008 revealed, trends will emerge and could easily last for years. EUR/USD and GBP/USD for example went on an upward multi year rampage after 1998 while post 2008 both dropped about 5000 pips. Its time for both to reverse. Under the worst scenario is volatility will remain. Respectfully, currency markets are in an incredible time presently. As we studied the 1998 and 2008 crash periods and Realignment, 10,000 exchange rates were entered to bring today’s vital information.
GBP/USD today is built upon solid bases at 1.2999, 1.2975 and 1.1944 with most vital 1.2999. Today’s bottom is ocated at 1.3014. To see bottoms, breaks must be seen at 1.3047, 1.3044 and 1.3030.
On the way down, 1.3160 must break then 1.3115, 1.3093, 1.3084, 1.3079, 1.3069 then on to 1.3047 and 1.3044.
Above big breaks still exist at 1.3224 and 1.3272. The longer range target as of today is 1.3543 with significant breaks above at 1.3698 and 1.3742. Lines are exact, daily yet dynamic and move constantly so forecast is today only.
Brian Twomey, Inside the Currency Market, btwomey.com