EUR/USD V USD/JPY, Cross Currency Basis: Levels, Ranges, Targets

As stated previously, for all 2018 trade strategy is to add and subtract 600 pips to most significant break points and range extremes as well as long and short points are established. Trend lines in USD/JPY and EUR/USD dated 10 years along the curve informs 600 pips as factual analysis.

At 600 pips factors to an overall 1200 pip year in 1 direction and this means a range trade year as well as a decent range in terms of previous years from 2008. At 1200 yearly pips is far below 2008 at 2500 but matches 2009 and 2010 at 1200 and 1100 pips. At 1200 pips factors far higher than 2011 to 2013 at 900 and 100 pips in each year in 2012 and 2013. In 2014 and 2017 experienced 1500 and 1700 pip years while 2016 was light at 400 pips. In 2012 and 2013, EUR/USD began and ended at 1.3200’s and then at 1.3200′ was a massive break point at the 10 year average. Once 1.3200 broke, the downtrend resumed to end at 1.0300’s in January 2017.

The most significant and turning point year by far was 2014 because it informed the 1.0300 bottom would fulfill its destination from 1.6000’s. From current day, 2014 remains a critical year as the change seen in currency prices is astoundingly crystal clear. EUR/USD was easily the leading pair to inform every other currency pair.

In 2009 was a 1200 pip corrective year from the 2500 point down move in 2008. EUR/USD’s 1700 point upmove in 2017 appears a correction but if termed a correction, EUR/USD has ability to travel far higher as the EUR/USD price is far to low and the downside is blocked.

EUR/USD for example reveals 1.1100 to 1.2300 while USD/JPY ranges from 118.00’s to 106.00’s. Despite outlines in 600 pip range extremes, prices represent bottom and uppermost boundaries and those prices aren’t recommended as good targets.

Why to short ranges is because EUR/USD and USD/JPY are married and contain zero distance between each other and the result is from 2014 price changes. The 125 USD/JPY and EUR/USD 1.0300’s extremes now trade next to each other. Both pairs are ready for a massive breakout especially viewed from pertinent years 2014 to 2017 as represented by Correlations at minus 33%, 13% and 18%. Married means neither USD/JPY nor EUR/USD can handle far downsides as both become severely oversold. The fight is to the upside.

The overall risk to 2018 is the Tax bill as $2 to $4 trillion is expected to repatriate from Europe at 8% then sustain a 20% tax thereafter. As Yellen reveals OIS in statements to derail readers, the pertinent indicator for 2018 is Cross Currency Basis as spreads in EUR, JPY and USD widened significantly since 2014 and remain wide today.

Wide spreads inform high risk to money markets and the message to central banks is money markets don’t trust current monetary policies otherwise spreads would trade narrow. Further to wide spreads is the enormous outflows expected from Europe. Much more exists to Cross Currency Basis but the side bar focus is my own interest rate methods related strictly to currency prices beats the academics writing on Currency Basis topics today.

The 2 main problems for the FED and ECB are interest rates were and are currently far to low. Both the FED and ECB rates are competing at the bottom against each other. Yet Fed funds current skyrocket overbought is the result to not allow a free float over 9 years otherwise Fed Fund levels would trade today appropriately. One main cause to wide Currency Basis is the same example presented in AUD/USD many months ago. Interest and exchange rates lack agreement, harmony and remain off kilter to each other.

USD/JPY upside boundaries are located from 116.05 to 118.42 while breaks below must occur at 112.16 then 111.77 and 110.64. Why rough downsides is the 5 year average is located at 108.88. Currently, USD/JPY is vastly oversold.

EUR/USD upside boundaries are located at the 5 year average now at 1.2013 and falling. Above break points: 1.1808, 1.1882, 1.1920, 1.1954, 1.2067, 1.2125, 1.2290 and 1.2321.

Below break points: 1.1733, 1.1544, 1.1502, 1.1437, 1.1411, 1.1358 and 1.1246. Current EUR/USD is overbought and located just below the 5 year average at 1.2013.

 

Brian Twomey

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