Imagine if you could trade only 5 fx pairs and that would be enough to get a sustainable income? Today we will cover:
Just as oil and the Canadian dollar are closely correlated, certain metals and the Australian dollar are also linked. There is a strong connection between the AUDJPY and the global stock markets and risk appetite.
If the broad stock market is due for a rise or fall the AUDJPY could be traded in a 24 hr market. Otherwise, divergences between the S & P 500 and the AUDJPY can be a sign for reversal giving a trader an edge for either short-term or long-term trading and profitable pips. This insight can provide valuable signals to short-term and swing trading depending on your risk appetite and patience at the time.
Correlation is used to predict which currency pair rates are likely to move in tandem and to use negatively correlated currencies for hedging purposes, according to Investopedia. The currency pair that correlates with the AUDJPY the closest is the EURAUD. The GBPAUD is the next closest with the USDCAD and EURNZD correlating less then the EURAUD and GBPAUD.
I watch for the times when the AUDJPY and EURAUD move together. The GBPAUD is sometimes much slower to respond but in time usually does, giving you a three-way trading opportunity. You can also use the AUDJPY to see when a reversal is coming on the EURAUD AND GBPAUD. This allows for more diversification and marginally lower risk. Understanding how currency pairs move in relation to each other, whether in tandem or opposite, is powerful information for traders allowing you to diversify, hedge, or double up in profits.
I find no matter what strategy I use, scalping, short-term, swing trading, it is important to keep in mind the correlation between the AUDJPY and the S & P 500.
The Australian Dollar and New Zealand Dollar keep a close tie with gold and oil prices. Shifts in the prices of both gold and oil have a significant influence on the AUDNZD. Their common geography and high rollover rates are primary indicators for their close relationship. Since Australia’s economy depends on the mining of minerals and raw materials the exchange rate of the AUD depends on the global price for gold and raw materials. New Zealand’s economy is primarily on sheep wool and products derived from this.
In trying to predict the AUDNZD you should be aware of each of the unique macroeconomic details of each country such as GDP level, unemployment rate, and labor market statistics. You should also factor in the state of the US economy. The AUDNZD of both currencies with the US dollar ie: AUDUSD AND NZDUSD are extremely resilient as both countries do well on similar fundamentals so what affects one pair will also affect the other in a similar fashion.
An AUDNZD correlation may give out the same buy/sell signals. Local issues may affect them differently, however, their main direction would remain the same, according to HFtrading. Because of this, you could possibly trade the GBBPNZD based on a similar pattern as the AUDNZD.
This pair does not follow global risk sentiment. Instead, it shows a strengthening when others are undergoing turbulence and uncertainty. It is reasonable to assume when two currencies move in tandem this is a result of a third variable that relates to them both. For example, if the USD were to go down in value the AUD may rally as well as the NOK, CAD, NZD. They are reacting in harmony to the USD decline. Other things that can affect currencies moving in tandem are cash flow, cross-ownership, and forced selling. Where profit taking or stop loss trading occurs you will find this usually is the result of currencies moving in tandem.
The Swiss Franc enjoys the reputation of being one of the most stable national currencies. As a result of increased volatility especially during the Asian and European sessions, the average daily movement of the CHFJPY can reach up to 200 – 300 points, according to Liteforex.
This pair is greatly influenced in relation to Japan and Switzerland. Since Switzerland has a stable political environment and the economy more attention should be turned to the Japanese economy. There is a strong correlation between the CHFJPY and EURJPY due to the close relationship of the Swiss Franc and the Euro. These pairs are noted for their characterization of a slight lagging of CHFJPY from EURJPY.
Daily FX reports that both of these currencies are viewed as safe-haven currencies as well as funding currencies due to their low-interest rates. The CHFJPY bottomed to 74.65 during the 2008 financial crisis and has since traded higher because of aggressive monetary Japanese easing.
What I like about EURAUD is … when it decides to move in a trend it is like a little freight train, methodically and steadily moving in the direction it wants to. Once it stops its trend it will sit and consolidate for quite a while giving you time to look over other potential trades and plan out your next moves. I often use the EURAUD to gauge what the GBPAUD and sometimes the AUDUSD are doing in relation to the EURAUD and use it as an indicator of what they will do. However, I really look them all over closely to ensure they are moving in the same direction and with approximately the same volatility.
FX Street states the EURAUD is a lost price without a correlation. EURAUD should correlate to the EUR USD, however, the current price level is wrong and off sync. The lost correlation to EURUSD has traveled to AUDUSD and AUDEUR.
Accounting to Forex.com the selloff in Bitcoin was good news for EURAUD. “Notice that except for a few weeks in December 2020 and a few days in February, the correlation between EUR/AUD and Bitcoin has been negative (bottom of the chart below). Currently, the correlation coefficient between the 2 assets is -0.90 on a daily timeframe. A correlation coefficient of -1.00 means that EUR/AUD and Bitcoin move perfectly in opposite directions 100% of the time. The current reading is considered a strong, negative correlation.”
Always keeping in mind that correlations can change at any time and fairly quickly, Bitcoin, EURAUD and EURNZD have a strong negative correlation on the daily timeframe at the moment. The EURAUD is considered a minor or cross pair and is affected by any change in the price of gold since Australia is the third biggest world gold producer.
This is a cross-currency pair with high volatility with strong market trends. It is the seventh most traded currency by volume, according to DayTrading. The exchange rate of the EUR and CAD is impacted by the monetary policies from the European Central Bank and the Bank of Canada. Although the USD is not represented here it should be noted that the value of the USD can still influence or directly impact the EURCAD.
Pairs like the EURCAD are bought and sold through a network of banks and brokers in a decentralized market. Regardless of how they are bought and sold, employment rates, political events, and demand for commodities such as oil can have an impact on the EURCAD.
The various reason why the EURCAD is popular to trade is high volatility, interest rates and the great deal of financial information available on the EURCAD. One of the drawbacks to trading this pair is it is a high-risk pair to trade due to the volatility and complex environment for novice traders. It is also highly sensitive to intense price fluctuations from political and economic events in Europe.
The best time to trade this paid is between the crossover between London and New York session, according to Statista. It is interesting to note that the exchange rate history of the EUR against the CAD shows a steady increase since 2015. There was a sharp decline in value due to the global recession. “Since 2012 the annual average EUR to CAD exchange rate has recovered but remains lower then what it was in 1999.”
These currency pairs are among the majors and if you trade them right they can boost your forex profits! If you want to trade more major pairs, I recommend having a look at the most traded forex pairs.