Brian Twomey
Brian's Investment
This week is a triangulation trade involving USD/CAD, CAD/CHF and CAD/JPY. A triangulation trade is a 3 way trade and in the CAD example involves 2 longs and 1 short. Traditional triangulation trades were always focused and traded with USD/JPY and JPY cross pairs. EUR/USD, EUR/JPY and USD/JPY is a classic triangulation.
The 3rd leg to the trade depends on EUR/JPY's correlation to either EUR/USD or USD/JPY. EUR/USD and USD/JPY represent longs and shorts while the long or short for EUR/JPY is determined by Correlation. Many triangulation trades exist in FX such as GBP/USD, GBP/CHF and USD/CHF or GBP/USD GBPCAD and USD/CAD.
Non normal pairs work as triangulations such as USD/JPY CAD/CHF and CHF/JPY. For CAD/CHF shorts are matched by longs in USD/JPY and CHF/JPY.
Middle pairs to triangulations are created for example by USD/JPY X EUR/USD = EUR/JPY. CHF/JPY is created by USD/JPY divide USD/CHF. GBP/USD X USD/CAD = GBP/CAD.
EUR/USD divide GBP/USD = EUR/GBP. AUD/USD divide NZD/USD creates AUD/NZD. Hit the caclulator at anytime during any trading day and a quick trade is created.
The derivation of the modern day triangulation trade was adopted with the European Union's implementation of Rule 1103/97 on September 11, 1997, a formal legality existed for calculating conversions to euro. (2011
This rule also established convertibility to six, then three, decimal places, and the adoption of triangulation as the legal norm for transacting business in the Eurozone.
The basic formula always works like this: A/B x B/C = C/B. The cross rate should equal the ratio of the two corresponding pairs. In pre Euro days, many cross pairs weren't readily available so the above formula was common knowledge to cross pair trading.
Today, traders pay a spread to enter a trade but in pre Maastricht Treaty days to adopt the Euro and before NFP 2009 rules to allow pay in spreads rather than by lots, a few example trades. From a 2011 article posted on the money show site.
For example, suppose we know the bid and offer of AUD/USD and NZD/USD and we want to profit from AUD/NZD.
AUD/NZD bid = AUD/USD bid divided by NZD/USD offer = a rate
AUD/NZD offer = AUD/USD offer divided by NZD/USD bid = a rate
The product of the rate through the bid/ask spread will determine whether a profit opportunity exists.
A three-pair triangulation opportunity such as GBP/CHF, EUR/GBP, and EUR/CHF, where GBP/CHF is quoted from EUR/GBP and EUR/CHF. Notice the base currencies within EUR/GBP and EUR/CHF; they equal the GBP/CHF, but we must make our euro conversions in order to achieve our objective.
GBP/CHF bid = EUR/CHF bid divided by EUR/GBP offer = a certain rate
GBP/CHF offer = EUR/CHF offer divided by EUR/GBP bid = a certain rate calculated in euro
Trades
Cad triangulations are arranged as CAD/JPY, USD/CAD and CAD/CHF. For CAD/CHF = USD/CAD top. CAD/CHF closed at 0.6905 and USD/CAD at 1.3996 and equals USD/CAD 1.4482. And USD/CAD 1.3996 = CAD/CHF 0.7144. As CAD/CHF rises then USD/CAD trades lower. Higher USD/CAD then CAD/CHF trades lower.
CAD/CHF and CAD/JPY longs = USD/CAD shorts while USD/CAD longs translates as CAD/JPY and CAD/CHF shorts.
USD/CAD is clearly the driver to the 3 trade combo in the short term and for the weekly trade as ranges are far wider than CAD/CHF and CAD/JPY.
While USD/CAD trades at near 67 year highs, CAD/CHF trades at 67 year lows. Any lower to CAD/CHF then a brand new average must be created to accommodate the lower price.
CAD/CHF and CAD/JPY are deeply oversold medium and long term while USD/CAD is deeply overbought.
CAD/JPY must trade to 80.07 , USD/CAD to 1.3578 and CAD/CHF to 0.7174.
For the week, currency prices are fairly balanced. EM currencies as well are fairly balanced.
Short 1.4114 and 1.4152 to target 1.3811. Must cross 1.4077, 1.4040, 1.4003, 1.3966, 1.3929, 1.3892 and 1.3855.
Short 1.3774 to target 1.3623. Must cross 1.3737, 1.3701, 1.3663 and 1.3626
CAD/JPY
76.58 and 76.18 to target 78.36. Must cross 76.83, 77.08, 77.33, 77.58, 77.83, 78.08 and 78.33.
Long above 78.62 to target 79.63. Must cross 78.87, 79.12 and 79.37.
CAD/CHF
Long 0.6898 and 0.6849 to target 0.7023.
Long above 0.7047 to target 0.7071.
Trading currencies and other financial instruments carries a degree of loss and possible loss of entire investments. Please managed your own risks, stop loss, and margins requirements.
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