Price & Time: Calm Before the Storm in EUR/USD?

Talking Points

• USD/JPY nearing important resistance
• GOLD testing major upside pivot
• EUR/USD sees 1-year volatility drop to lowest level in 6 years

Unfamiliar with Gann Square Root Relationships? Learn more about them here.

Foreign Exchange Price & Time at a Glance:

Price & Time Analysis: USD/JPY

Charts Created using Marketscope – Prepared by Kristian Kerr

• USD/JPY briefly broke above the 3rd square root relationship of the year-to-date high at 102.40 yesterday before closing lower on the day
• Our near-term trend bias is lower in the exchange rate while 102.40 holds
• Interim support remains around 101.35, but a move back under 100.80 is really required tosignal a resumption of the broader decline
• A very minor cycle turn window is seen mid-week
• A daily close over 102.40 would turn us positive on USD/JPY

USD/JPY Strategy: We like the short side while 102.40 holds.

Price & Time Analysis: GOLD

Charts Created using Marketscope – Prepared by Kristian Kerr

• XAU/USD traded to its highest level since mid-November earlier today
• Our near-term trend bias is higher in the metal while above 1243
• The 61.8% retracement of the October to December decline near 1292 is critical resistance with a daily close above needed to confirm that a more important move higher is unfolding
• The middle of next week looks to be the next turn window of importance
• Only a daily close below 1243 would shift the near-term trend bias lower

XAU/USD Strategy: Like the long side while over 1243.

Focus Chart of the Day: EUR/USD

1-year implied volatility in EUR/USD reached its lowest levels since late 2007 yesterday. While many take this as a positive sign and proof that central bank policies are working, we view this occurrence with a lot more skepticism and trepidation. Volatility is inherently mean reverting and prolonged periods of low volatility usually lead to much higher vol regimes when this dynamic plays out. The last time Euro volatility was at such low levels is a great example of how quickly things can change. In late 2007 the consensus view of the financial landscape was very positive. The S&P 500 had seemingly weathered the ‘subprime issue’ and was just off all-time highs. Europe was basking in the glow of monetary union with Spain and Ireland the poster children for the project’s economic success. We all know the rest. Within a year the S&P 500 was down almost 50% from its all-time highs as subprime it turns out was not all that contained. Within three years European Monetary Union went from a great economic success to a failing project with member states pleading for international bailouts and seriously contemplating exit from the Eurozone. We’ll leave it to the reader to find the possible parallels with today, though if peripheral short-term borrowing costs at post EMU lows doesn’t send shivers down the spine then we don’t know what will. Perhaps the great 20th century economist Hyman Minsky said it best “stability begets instability”. Things looks awfully stable right now.

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--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com

To contact Kristian, e-mail [email protected]. Follow me on Twitter @KKerrFX