Realignment: EUR/USD, USD/JPY and JPY Cross Pairs

EUR/USD, AUD/USD, NZD/USD and GBP/USD all trade not only in deep oversold territory and further dropping but all currency pairs lost control to proper attachments to its JPY cross pairs. EUR, AUD, GBP and NZD broke below vital break points to allow the drops to oversold but JPY cross pairs failed to follow.

EUR/USD for example trades below 1.0982 Vs EUR/JPY above at 120.06.

AUD/USD trades below from 0.6769 while AUD/JPY trades above at 74.00

NZD/USD trades below from 0.6465 while NZD/JPY trades above at 70.68.

The ultimate story is GBP/USD trades below 1.2925 and GBP/JPY far above at 141.33

The opposite side is severely overbought USD pairs beginning with USD/JPY from vital 109.32 trades above, USD/CAD at 1.3215 trades above and USD/CHF at 0.9797 trades above.

USD/CHF above at 0.9797 also reveals correctly CHF/JPY above at 111.61.

The wild card pairs are always USD/CAD trades above yet on the brink and CAD/JPY correctly trades above.
Overall USD/JPY and all JPY cross pairs trade above respective high / low break points while all Non USD pairs trade below.

USD/JPY above vital high/ low point and all JPY cross pairs trading above vital points not only explains why EUR and non USD pairs continue drops into oversold but also explains current far deviations in USD Vs Non USD pairs. A deeper explanation to present currency markets is a Realignment.

As an example, most widely traded EUR/USD, EUR/JPY and USD/JPY.

Currently USD/JPY owns EUR/JPY and EUR/USD is odd ball currency kicked to the curb. Most stunning and rare to the synopsis to realignment is GBP/USD, GBP/JPY and USD/JPY.

USD/JPY now owns GBP/JPY and GBP/USD is also left on its own. GBP/JPY is a highly special currency pair and rarely loses its attachment to GBP/USD. For GBP/USD to lose its association to GBP/JPY is a massive development.

Typical and correct currency pair arrangements in currency markets are AUD/USD owns AUD/JPY, NZD/USD owns NZD/JPY, EUR/USD owns EUR/JPY, GBP/USD owns GBP/JPY. In this development, USD/JPY is left on its own. Normal trading then means for example, AUD/USD and AUD/JPY are the same trade as AUD V AUD, long or short as a double trade.

Mathematically, the word “own” means a massive Correlational shift. Correct is EUR/USD and EUR/JPY as rightful owners by EUR V EUR and strong Correlations while USD/JPY as odd currency contains no correlational association to EUR/USD or EUR/JPY.

In current Realignment, the reverse now holds which means USD/JPY and JPY cross pairs are now the double trade to long or short. But it also means USD/JPY as new owners to JPY cross pairs holds a strong Correlational association to JPY cross pairs and no association to EUR/USD.

To define a Realignment, its a Correlation shift or transfer from either negative to positive or positive to negative, depending which currency pair is affected. Correlation is a commentary and derivation on a Standard Deviation which is the overall glue that holds currency prices and currency markets together by defining movements.

The last 2 major Realignments occurred from 1998 to 2008 and from 2008 to present. Generally, major Realignments last roughly 8- 10 years. Within the 10 year framework, mini Realignments occur to last anywhere from 2 to 3 years. How strong and lasting are major Realignments requires a view to at least 10 years of Regression Statistical moving average data from EUR/USD, EUR/JPY and USD/JPY.

Seen from the data to include Correlations however are longer term trades to last for mutli years as the data sees the future over many years. Year 2007 was clearly evident to the impending 2008 crash and the massive Correlations shift as the Correlations from USD/JPY and EUR/USD revealed a top.

By defining movements addresses predominantly ranges. Residual Plots define multi year boundaries and ranges compress when USD/JPY owns JPY cross pairs and expands when EUR/USD for example owns EUR/JPY. Same principle for AUD/USD VS AUD/JPY, GBP/USD V GBP/JPY. Its a USD Vs Non USD move as USD volatility is quite low when USD is the dominant feature to currency markets and contracts when in its descent.

The derivatin to current Realignment by speculation derives from DXY at 99.00’s as the 5 year average is located at about 95 to 96.00. DXY naturally allowed USD/JPY to trade hgher, non USD to trade lower and JPY cross pairs to attach to USD/JPY. Then JPY cross pairs transforms to trading exactly the same as USD which means they are now USD pairs rather than non USD pairs when attached to for example EUR/USD and EUR/JPY.

For USD/JPY watch 112.03 at the 5 year average, EUR/JPY at 123.21, GBP/JPY 147, CHF/JPY 114.14 and CAD/JPY at 85.77.
Under Realignment, USD/JPY, USD/CHF and JPY cross pairs higher while Non USD pairs much lower. If my speculation is correct then markets could very well be under at least a 2 -3 year Realignment.

Interested students of the markets are invited to read my 2015 academic paper when EUR/USD, EUR/JPY and USD/JPY were analyzed by 10,000 exchange rate data from 1998 to 2008 and 2008 to 2015.


Brian Twomey