Interesting divergence in the majors

matrixDuring yesterday’s overall market volatility the forex market posted some very interesting and intriguing price action and candle patterns, particularly with regard to the major pairs.

As a general rule of thumb whenever the market becomes agitated and adopts a ‘risk off’ mood traders and investors can expect a strong move into safe havens such as the US dollar and gold. However, as has been the case recently where we have seen a breakdown of correlations and traditional market relationships, the USD did not react as many would have expected.

A look across the daily charts of our 7 major pairs not only reveals this divergence, but also highlights the importance of understanding volatility, particularly with respect to its affect on the ATR of an instrument.

As we can see from the charts only three pairs escaped triggering a volatility candle, and these were the USD/CAD, the USD/CHF and Cable with the USD rising strongly in the first two pairs, but falling in Cable.

Of the remaining four pairs of our majors matrix, where the volatility indicator was triggered, whilst we had strong gains for the USD against the Aussie and Kiwi, the USD fell heavily against the euro and the Japanese Yen. Of course, the USD/JPY was simply reacting to the heavy falls in equity markets, and the fall in the commodity dollars was only to be expected given their exposure to China.

The advantage of having such a volatility indictor trigger is that it can signal what we can expect from subsequent price action. For example in the eurodollar where in yesterday’s trading session the pair traded in a 345 pip range, it is no surprise to see price action retreat back into the spread of yesterday’s dramatic move, and indeed eurodollar has moved substantially lower as the pair approaches a very strong region of support in the 1.1460 region where the 200 ma also awaits.

Moves in the USD/JPY were even more epic as the pair crashed from 122 down to 116 before a combination of VPOC and price action support halted the slide, plus a move higher in the indices saw the pair close the session at 118.42, and all accompanied with strong volume. Again it is no surprise to see USD/JPY remain within the spread of yesterday’s price action, as well as move higher on the back of a reversal in fortune for equities. What is particularly interesting for USD/JPY is today’s move has taken the pair back to test the volume point of control in the 119 region at time of writing.

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