How Does the Euro’s Trading Range Stack Up Historically?

Since the beginning of the year, the EUR/USD has had a trading range of 21 big figures or 2100 pips.

The high of 1.6038 was set back in July and while the low (so far) of 1.3882 was hit last Friday.

With an average annual range of 1900 pips since the Euro’s inception, the move may seem unprecedented to many traders. However that is not true, in 2003, the EUR/USD had a 2300 pip range and in 2002, the range was approximately 2200 pips.

On a percentage basis, the range that we have seen thus far pales in comparison to the move that we saw in 2003.

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Nonetheless, EUR/USD 1 month volatilities continue to be at the highest level since 2001. For currency traders, the latest move in the EUR/USD compared to its move historically suggests that 1.3882 is not far from the bottom in the EUR/USD and it should just be a matter of time before the dust settles and the volatility and trading range of the EUR/USD starts to contract.

The offsetting factors of negative news in the US banking system and the substantial decline in oil prices could be what keeps the EUR/USD range bound (albeit a wide range).

The 3Ps Push the Dollar Higher

The US dollar continues to recover this morning on the aftermath of the 3Ps – Paulson, Plosser and price of oil. Oil prices are trading on the $125 handle and since last Monday they have fallen more than 14 percent. If oil prices reach $100 a barrel, half of the Fed’s problems would be solved; Consumers would become more liberal with their spending while businesses would become more optimistic.

As for Plosser and Paulson, the Fed President called for interest rates to be increased sooner rather than later, reminding the traders that the Fed still has their eyes on a rate hike.

US Treasury Secretary Paulson was confident that Congress would approve his housing rescue plan this week and so far they are moving forward as planned, with some adjustments.

Paulson proposed increasing Fannie and Freddie’s credit line with the Treasury and permission to buy stock in the mortgage giants. The deal that is likely to come out of the House and Senate would permit the government to inject billions of dollars in Fannie and Freddie and to insure up to $300B in refinanced mortgages. The plan is up for vote at the House of Representatives today.

Meanwhile EUR/JPY has hit another record high and is trading within a whisker of 170. Here’s my explanation of why EUR/JPY has performed so well over the next few months.

Finally, keep an eye on the Beige Book report of business activity which will tell us how the US economy is faring.

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Understanding Why EUR/JPY Hit a Record High

Although it has been relatively quiet in the foreign exchange market today, the Euro hit a record high against the Japanese Yen. The primary reason why EUR/JPY has rallied 11 percent over the past 3.5 months is because of US growth – not many people realize that the price action of EUR/JPY is directly correlated with how the US economy is doing.

According to the following chart, there is a strong correlation between manufacturing ISM and EUR/JPY. The arrows on the chart point to the times when manufacturing ISM had a meaningful dip below the 50 boom / bust level. This has happened more than 7 times over the past 20 years. Each time the US manufacturing sector contracted, EUR/JPY rallied. On average, from the month that ISM contracted to the month that ISM moved back above 50, EUR/JPY rallied 314 pips.

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The drop in leading indicators last month indicates that the US economy is still in trouble. The rally in the stock market is running out of steam as oil prices begin to rebound. If the US economy and in particular, the manufacturing sector continues to slip, EUR/JPY could not only break 170 but possibly hit 175 before the end of the year.

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Dow Breaks Bear Stearns Low, EURJPY Hits Record High

Two significant milestones have been reached in the financial markets today, one in stocks and one in currencies.

On an intraday and possibly even on a closing basis, the Dow Jones Industrial Average has broken the Bear Stearns low. It was in the middle of March that the Bear Stearns debacle became public, sending the Dow to a low of 11,731. That level was broken within the first minute of trading today.

In the currency market, EURJPY hit a record high of 169.46.

The parabolic move in these two assets are driven partially by the 3 factors; the rise in oil, the technical break of a previous low and news that Goldman Sachs put Citigroup stock on its sell list and downgraded several other brokers. This drove Citigroup stock to a 10 year low.

The market was already bearish dollars following the FOMC rate decision. Today’s breakdown in US stocks and mixed economic data has sent the US dollar even lower. GDP and existing home sales were stronger than expected, but jobless claims and the help wanted index deteriorated, pointing to a weak non-farm payrolls report next Thursday.

Meanwhile is interesting that EURJPY which is often times considered a carry trade currency is not necessarily moving in lockstep with the Dow. It did give back some of its gains but given the move lower in USD/JPY, it is clear that the rise in EUR/JPY is driven by the move in the euro. The relationship between the Dow and carry trades has broken down as the monetary policies of central banks around the world diverge.

Expect this trend to continue in the coming week.

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