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Currency Relations

Thu, Apr 3 2008, 15:50 GMT
by Sunil Mangwani

FibForex123

In the world of trading, the characteristic of each currency pairs hold a certain correlation with the other pairs, and it’s worth taking the effort to study these.

since each of them exhibit distinct identities.

Some currencies exhibit similar movement patterns, while some have opposing patterns, both of which can help a trader confirm price movements.

The closest relation can be found between the EUR/USD & USD/CHF.

The price movements of these two currency pairs are absolute mirror images.

In short, they have an inverse relationship.

If Eur/Usd is rallying, then Usd/Chf should have downward movement, and vice-versa.

The following chart has a comparative price movement of both these currencies, and this inverse relation can be seen very clearly.

So how does one take advantage of this?

The most obvious fact is that one must not trade both the currencies at the same time.

If one is long the Eur/Usd, logically one should not be long the Usd/Chf at the same time, since the Usd/Chf would have a downward movement.

And…neither is it advisable to take opposing trades on these two pairs, because if the trade goes wrong, then the trader would incur losses in both the trades.

Ideally, one should trade either of the two pairs.

The best way to take advantage of this fact is to cross-check a trade by looking for confirmation factors on the other pair.

If a trader is planning to take a long position in the Eur/Usd, he can look for a similar short setup on the Usd/Chf.

If such an opposite setup is present in the Usd/Chf, it only adds further credence to his long Eur/Usd trade.

Other Currency correlations

In addition to the correlations between the currency pairs themselves, one must also be aware of the deep correlations that the currencies have with other markets.

One can use these factors to confirm the expected price movements of the currency being traded…and as always a second confirmation is always better..and safer.

US Dollar Index

The USD Index measures the performance of the U.S. Dollar vs. a basket of currencies.

This basket consists of the following currencies: Euro 57.6%, Japanese Yen 13.6%, Great Britain Pound 11.9%, Canadian Dollar 9.1%, Swedish Krona 4.2%, Swiss Franc 3.6%.

(The Euro comprises the largest segment of the basket because it replaced the West German Mark, the French Franc, the Italian Lira, the Dutch Guilder and the Belgian Franc, all of which were formerly represented in the index prior to the introduction of the Euro.)

A breakdown of the components of the U.S. Dollar Index.

Looking at some other correlations of the Eur/Usd, the following ones are also very effective.

Eur/Usd up – Gold up

In addition some of the other important inter market correlations are -

• S&P 500 down – Usd/Jpy Down
  
• Gold up - Nzd/Usd & Aud/Usd up
  
• Oil up – Usd/Cad down (Canadian Dollar up)
  
• Commodities (the CRB Index) up – USD down.

Published on  Thu, Apr 3 2008, 16:11 GMT