EUR/USD and Interest Rate Corridors: Levels, Ranges, Targets

 

The 5 day volatility Rule after an interest rate rise or fall is traditional and inherent to currency markets on prices. Its a concept never to leave markets but we’ve not seen the effects lately. The best example was seen in NZD as the RBNZ raised and lowered OCR . I suspected this effect as EUR/USD 1.1180’s reported yesterday was not seen for 24 hours. This spoke volumes to the post 2008 currency market consequences.

The lack of volatility addresses interest rate Corridors and the relationships between and among nation’s interest rates. A few examples.

Sept 26, 2008, the Europe Vs USD corridor was 4.52 Europe Vs 1.08 USD for a 3.44 corridor to favor EUR. June 16, 2011, the corridor compressed to favor Europe and EUR/USD at 1.52. What happened was seen in the numbers 1.62 Europe Vs 0.10 USD.

June 16, 2014 another compression materialized by 0.59 Europe Vs 0.10 USD for a 0.99 corridor to favor EUR/USD. July 13th 2012 , The Corridor Favored USD by Europe 0.14 Vs USD 0.19 for a minus 5 basis point corridor. Before Yellen raised Fed Funds, the corridor favored USD by Europe 0.64 Vs 0.91 USD for a 27 basis point difference. After Yellen raised, the corridor widened to roughly 36 basis points. Roughly because Fed Funds 30 day Futures traded and closed yesterday on heavy volume at 0.98. The absolute settlement price for Fed Funds will be known today and it should be the final price to carry us forward in currency prices for days ahead.

Why lack of volatility is the result to marriage in interest rates between and among nations. This concept won’t last forever and one day it will return to see interest rate corridors widen.

What’s the USD/JPY movement dilemma, 0.91 Vs 0.90 JPY and minus 10 today to not favor USD. USD/CAD is favored positively to USD.

3 pairs with the best volatility potential based on Corriors are GBP, NZD and AUD. GBP/USD is negative GBP 70 before the Yellen raise and about 80 after the rise. This explains why the 3 votes to raise by the BOE. UK interest rates and GBP are dangerously low yet UK economics favors leave interest rates alone. Economics must pull GBP from low levels and to raise rates later otherwise the corridors will expand if Yellen raises again. Likewise, USD economics must justify Yellen’s raise or Fed Funds drops and GBP Vs USD Corridors compress from current wides.

Explained was lack of interest rate volatility but not necessarily a guaranteed trade. In the old days of currency markets, good possibility but when Libor was eliminated, nations redesigned interest rate system to manipulate currency prices to their desired advantage. See AUD and the mastery of the RBA as a great example. We don’t trade against the market or market traders as the trade today is trader Vs powerful Central banks.

EUR/USD overall vital support is located at 1.1022. This is the big break line to see a far lower EUR. Far lower means below extremes are located at 1.0600;s as opposed to above at 1.1500;s. EUR/USD at 1.1100’s is almost dead between 1.0600’s and 1.1500. Why higher 1.1200’s provided resistance is EUR was at range tops and lower 1.1300’s was tracking lower on EUR prices.
Previous 1.1300’s is today 1.1254 and a massive resistance point. Below EUR supports are located at 1.1107 and 1.1055. The big break at 1.1022 for today is safe.

USD/JPY big breaks are today 111.25 and 111.73. GBP/USD supports are located today at 1,.2741 and 1.2730. The downside for GBP will become a rough proposition in days ahead.

 

Brian Twomey

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