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Currency Relations

Thu, Apr 3 2008, 15:50
by Sunil Mangwani | FibForex123
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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.

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. the Italian Lira.6%. If such an opposite setup is present in the Usd/Chf. all of which were formerly represented in the index prior to the introduction of the Euro. Swiss Franc 3. This basket consists of the following currencies: Euro 57. a basket of currencies.2%. he can look for a similar short setup on the Usd/Chf. the French Franc.6%. 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 should trade either of the two pairs.Ideally.1%.S. it only adds further credence to his long Eur/Usd trade. Swedish Krona 4.9%. Canadian Dollar 9. Dollar Index.and safer. The best way to take advantage of this fact is to cross-check a trade by looking for confirmation factors on the other pair. (The Euro comprises the largest segment of the basket because it replaced the West German Mark.. Japanese Yen 13. the Dutch Guilder and the Belgian Franc. US Dollar Index The USD Index measures the performance of the U. If a trader is planning to take a long position in the Eur/Usd.S. .) A breakdown of the components of the U. Great Britain Pound 11. Dollar vs.6%.

Nzd/Usd & Aud/Usd up  Oil up – Usd/Cad down (Canadian Dollar up)  Commodities (the CRB Index) up – USD down.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 .