EUR/USD, EUR/JPY, USD/JPY Correlations: Levels, Ranges, Targets

EUR/USD negatively Correlates to EUR/JPY at minus 14% and EUR/USD negatively correlates to USD/JPY at minus 63%. EUR/JPY trades as the same exact pair with USD/JPY because the USD/JPY and EUR/JPY correlations run + 85%. For the current risk off trading environment, correlations are correct. Where the trade signal generates from a correlation perspective is an extremely low EUR/JPY.
At 14%, EUR/JPY is fast approaching bottoms and this is known because a cross pair can’t fall outside the EUR/USD and USD/JPY trading boundaries. Its mathematically impossible but it also goes against the grain in the purpose for cross pair construction, design and purpose.
Cross pair correlations revolve and in the case of EUR/JPY it switches from EUR/USD to USD/JPY over time. The correlation to EUR/JPY informs the type of markets that trade and its either risk on or risk off. From 2000 to 2008 in risk on environments, EUR/USD and EUR/JPY were married at + 93%. EUR/USD and EUR/JPY skyrocketed higher. Since the 2008 crisis, EUR/USD and EUR/JPY began at + 57% but now negatively correlates at minus 14% in risk off markets. EUR/JPY went from 169.00’s in 2008 to current 116’s and a 5293 pip drop.
EUR/USD and EUR/JPY will eventually remarry and positively correlate which means EUR/USD and EUR/JPY will travel far higher together. What changes negative to positive correlations are significant break points must occur and this is where 7 to 10 year period averages come into importance.
The change will be seen when USD/JPY drops its EUR/JPY correlation from 85% to below 50% and turn negative. Then the EUR/USD and EUR/JPY remarriage begins as well as the multi year long trade. Further, a 5200 pip drop is highly unusual which informs how off kilter are economics and markets since 2008. Normalized boundaries for EUR/JPY in any given period and particularly 2000 to 2008 and 2008 to present is about 2500 to 3000 pips.
The overall aspect to correlations and exchange rates is to inform just how aligned, integrated and married is the nations and markets. One weak link, one disaster in the chain in our current world can bring down the entire world system. Where weak links are seen however are not in exchange rates but in interest rates.
EUR/USD in ranges is the same old 500 pip story from 1.0884 to many amd solid bottoms at 1.0300’s. Current EUR/USD is oversold from a daily and longer term perspective. Yet the must break points to head higher are located at 1.0629, dropping 1.0661 and 1.0694. Massive daily resistance is located from 1.0620 to 1.0624. A break higher at 1.0694 then EUR/USD runs into a brick wall at 1.0740’s. Higher for EUR/USD means a slow slow grind due to many resistance points. Lower means more oversold.If we can catch a 1.0560 ish today, we’re long.
EUR/JPY. Longer term, falling lines at 118.82, 119.84 and 120.86 are descending on current prices and forcing EUR/JPY into a slow grind lower. To understand 119’s, many range break poinst are located at 119.00’s. For current oversold EUR/JPY to travel significantly higher particularly today then 117.01 and 117.67 must break. Not likely We’re selling rallies and long bottoms until conditions change.
USD/JPY. We are looking today for longs at 109.00’s and we’re short in the 109.80’s. Thick resistance above is located at 109.80 to 109.86 and this would prevent a further rise to the top at 110.27.

 

Brian Twomey

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