The primary currency market story over the past 2 weeks is the significant rise to wide range currencies and to travel to current severely overbought status. Wide range currencies switched correlational allegiances from the second side of the currency pair back to the respected cross pair in the universe. The correlation shift allowed wide range currency pairs to trade to exorbitant overbought levels.
EUR/AUD for example now correlates to EUR/USD at a healthy + 69% and -43% to AUD/USD. As EUR/USD traded 200 pips higher last week, EUR/AUD traded 500 pips higher. For every 2 pips of EUR/USD, EUR/AUD trades 5.
AUD/USD is not only on the lost side of the EUR/AUD arrangement but was continually sold as EUR/USD and EUR/AUD reached higher levels. EUR/AUD is not only severely overbought but AUD/USD and AUD/EUR sit this week and past weeks at deeply oversold levels.
A Correlation change requires a break of an average and a break of an average forces a change back. EUR/USD for example trades safely above 1.0555 while AUD/USD trades below vital 0.6752 and EUR/AUD above 1.5636.
The dominant EUR/USD V EUR/AUD correlation at 59% translates to a double trade as EUR/USD and EUR/AUD. EUR/USD as a correlation to EUR/AUD is correct as anchor pair EUR/USD is always intended to correlate to all cross pairs within its universe.
EUR/NZD correlates to EUR/USD at +59% and -11% to NZD/USD. Both AUD/USD and NZD/USD traded to bottoms and in decreasing ranges as EUR/USD and EUR/NZD traveled higher.
EUR/CAD correlates to EUR/USD at +93% but USD/CAD also correlates positively at +80%. USD/CAD trades safely above 1.3547, EUR/USD above 1.0555 and EUR/CAD above 1.4298. USD/CAD is off kilter.
GBP/USD Vs GBP/AUD, GBP/NZD, GBP/CAD, GBP/JPY
GBP/AUD correlates to GBP/USD at +19% and -60% to AUD/USD. While GBP/AUD lacks a correlation to an anchor pair, GBP/AUD followed its currency market function by trading alongside leader currency as EUR/AUD. Both GBP/AUD and EUR/AUD correlate at +95%.
GBP/NZD correlates to GBP/USD at -40% and -69% to NZD/USD. GBP/NZD correlates to EUR/NZD at +76%.
GBP/CAD correlates to GBP/USD at +78% and USD/CAD at +74%. GBP/JPY correlates to GBP/USD at -82%.
GBP/USD classifies as a problem currency due to lack of correlation agreement to its cross pairs. Generally, GBP/USD is deficient to upward movements without cross pair assistance.
GBP/NZD Vs EUR/NZD and EUR/AUD Vs GBP/AUD.
As written to long term targets, EUR/NZD is the dominant trade signal currency to GBP/NZD and EUR/AUD drives trade signals to GBP/AUD. GBP/AUD follows EUR/AUD while GBP/NZD follows EUR/NZD. Verified not only by averages but Correlations.
The Week
EUR/USD and EUR cross pairs is clearly the preferred trade category for the next few weeks as EUR/USD contains solid correlations to its cross pairs.
EUR/USD trades from 1.0555 to 1.0727 and bottom at 1.0400’s while DXY travels this week from oversold 103.00’s to overbought 106.00’s. DXY at 107.00’s represents the 50% correction zone from the 114.79 drop to 100.00’s while EUR/USD long term sits at solid bottoms at 1.0200’s and 1.0100’s from the 1.0800 drop to 0.9500’s and from the rise to 1.1032 from 0.9500’s. DXY serves as market leader to next big currency market moves.
USD/CAD rose to 1.3800’s last week and held due to the deep drop to overbought CAD/JPY and CAD/CHF. Sufficient distance and a more solid relationship exists to oversold CAD/JPY and CAD/CHF to overbought USD/CAD. Plus USD/CAD Correlates -59% to CAD/JPY.
JPY cross pairs trade deeply oversold to CAD/JPY, AUD/JPY and NZD/JPY and fairly neutral to EUR/JPY and GBP/JPY. GBP/JPY 162.59 decides longs and shorts while EUR/JPY 143.20 determines EUR/JPY’s direction.
USD/JPY must break 135.76 to target again 136.00’s.
GBP/USD at 1.2000’s and USD/CAD at 1.3800’s spreads 1800 pips and miles to wide. Spreads should fall back to easily 1000 pips. USD/CAD targets low 1.3600 easily this week.
EUR/AUD targets easily 1.5800’s, GBP/AUD 1.7900’s, EUR/NZD 1.7000’s, GBP/NZD 1.9300’s.
Wide range currencies are subject to Gap openings for Sunday.
EUR/USD will open Sunday from 1.0630 – 1.0645, GBP/USD 1.2037 to 2.2020, EUR/AUD 1.6165 to 1.6142. EUR/USD open at 15 pips is baked inside the price
EUR/USD longs anywhere from 1.0606 and below and back to 1.0700’s.
EUR in the EM category is overbought Vs EUR/SEK, EUR/NOK, EUR/KRW, and oversold as EUR/PLN, EUR/THB and EUR/MYR. Despite EUR/NOK and EUR/SEK overbought, the USD side is also overbought as USD/NOK and USD/SEK.
EUR/GBP watch 0.8808. Severely oversold GBP/CHF provides the only assistance to GBP/USD to prevent a massive drop. Same for deeply oversold EUR/CHF to hold EUR/USD from a deeper fall.
SPX next low is located at 1.3810. Last week’s lows at 1.3904 traded to 1.3847 and extra points. Since January’s SPX post to long term, SPX traded 3700’s to 4100 or 400 points and 200 points per month. The 5 year average at 3400’s is close. Higher EUR/USD assists to higher SPX.
Brian Twomey
BRIAN TWOMEY ON TRADING 