Inside the Currency Market: EUR/USD Vs USD and correlations

Brian Twomey Brian's Investment

An explanation to EUR/USD exorbitant 265 pip rise in 3 weeks from 1.1186 to 1.1451 is partly due to USD.

USD/JPY failed to participate to meaningful trading over the past 3 weeks because it doesn't have ability to move. The result is a severe price compression to USD/JPY as moving averages are contracting against current prices and forcing day by day, tighter and tighter ranges. Tighter ranges normally warrants a terrific breakout but not when prices and averages compress alongside ranges.

USD/JPY 106.00's becomes deeply oversold while 107.56 must break to target overbought at low 108.00's. Longer term, 106.00's represents a multi year bottom and the only average to hold USD/JPY from a drop to 102.00's. Shorter term, USD/JPY faces massive resistance at 108.73 and 108.95. Both points won't trade anytime soon as USD/JPY hits the extremes at low to middle 108.00's. USD/JPY is just plain stuck and a viable trade doesn't exist.

USD/CHF across the board at 0.9700's longer term represents not only massive resistance but high 0.9600's achieves extreme overbought status. To move higher, 0.9524 must break but USD/CHf lacks ability to trade much higher nor can current prices hold above 0.9500's. Overall range becomes 0.9300's to 0.9500's and 0.9600's. Barely a 300 pips range from upper and lower extremes.

USD/CHF at current 0.9383 is deeply oversold and the best target for the week is 0.9485. At 0.9485 places EUR/USD at 1.1322 and about a 100 pip trade for long USD/CHF and short EUR/USD.

The confirmation to USD/JPY and the same USD complement pair is CHF/JPY and at current 114.0's sits at deep overbought. CHF/JPY lacks its normal compliance to USD/JPY and at 114's and overbought, lacks agreement to oversold USD/CHF.

CHF/JPY is a trending currency pair historically but only tight ranges currently exist. The explanation to off kilter as USD is CHF/JPY at overbought correlates to EUR/USD at 96%. CHF/JPY bolted from its normal USD roots to trade as EUR/USD.

Current EUR/USD at overbought 1.1400's and overbought CHF/JPY results in a double trade short for the week.

CHF/JPY trades above massive supports at 111.73 and 112.02 and both hold CHF/JPY from a fall to 109.00's and 107.00's. Longer term, 110.00's represents price extremes which says 109.00's and 107.00's won't trade anytime soon. Shorter term, CHF/JPY middle 114.00's becomes deeply overbought vs oversold at middle 111.00's and again like USD/CHF, barely a 300 pip range. Only a break of 112.96 targets 111.00's and complements to EUR/USD break for lower at 1.1218.

Wide rangers GBP/NZD, EUR/NZD, EUR/AUD and GBP/AUD lack significant correlations to underlying GBP/USD, EUR/USD and to AUD. All experienced dramatic drops over the past 3 weeks. The drop coincided to falls in USD which means wide range currency pairs transformed from correlation and association to underlying to track and correlate to USD.

GBP/NZD for example correlates -98% to EUR/USD and +86% to USD/JPY, +98% to USD/CHF and -98 % to CHF/JPY and +39% to USD/CAD. Further confirmation to short EUR/USD and CHF/JPY is revealed by correlations as opposites to USD. More significant to determine GBP/NZD rises alongside USD.

EUR/NZD as well transformed as USD by correlations to +83% vs USD/CAD, +86% to USD/CHF, +39% to USD/JPY and -83% to CHF/JPY.

Wide rangers as USD rises when USD trades higher. GBP/USD's universe then includes only GBP/USD, GBP/CHF and GBP/JPY while GBP/CAD lacks direction and proper correlations to either fully GBP/USD or USD/CAD.

GBP/USD overall is located inside a large neutral zone and will trade to either high 1.2400's or high 1.2600's.

GBP/AUD is no different as correlations runs +91% to USD/JPY, +97% to USD/CHF, +26% to USD/CAD and -93% to CHF/JPY. GBP/AUD is currently a USD pair.

EUR/AUD correlations +93% to USD/CHF, +81% V USD/JPY, +44% V USD/CAD and -93% to CHF/JPY.

A total of at least 7 currency pairs as USD or straight USD dropped over 3 weeks against EUR/USD and EUR/USD in week 3 traded to and remains today at the start of the week in richter scale overbought. USD is the driver rather than EUR/USD on its own as its rare when EUR/USD trades to such extremes and sustains itself.

The shining light to USD is the old reliable USD/CAD as USD/CAD was born with wide range movements and is always the best of the USD trades compared to USD/CHF, USD/JPY and CHF/JPY.

Upon a EUR/USD correction, best trades this week are wide rangers, GBP/NZD, GBP/AUD, EUR/NZD and EUR/AUD.

While EUR/USD is the main focus, AUD/USD and NZD/USD remain and trades in light years overbought. The difference between EUR/USD currency pairs is AUD and NZD pairs in the universe are running on all cylinders.

Author

Brian Twomey

Brian's Investment

Brian Twomey is an independent trader and a prolific writer on trading, having authored over sixty articles in Technical Analysis of Stocks & Commodities and Investopedia.

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