Currency is priced in pairs, although no currency pair moves in isolation from the movement of other currency pairs. This makes it necessary to understand the relationships between the currencies.
For example, if the currency pair “A” moves in the same direction as the currency pair “B”, let’s assume that we are closely following the currency pair movement. If we expect the currency to rise and then buy it but since we do not follow the B currency closely, if it happened suddenly and looked at the technical or fundamental analysis and we received a signal that the pair will start to retreat and accordingly we sold this pair. What will happen in the end is that we will end the trade on a Profit Ball profit from a pair and also on a loss for the other pair because both are going in the same direction. A similar situation may occur if we buy or sell two other currencies at a time when there is an inverse relation between them that makes each move in the opposite direction to the other direction.
Once we recognize the quality of these relationships and the extent of their change over time, we can benefit from this advantage to control the degree of exposure of our investment portfolio.
The correlation coefficient is between -1 and + 1.
The + 1 sign means that my currency pair will move 100% in the same direction all the time. The correlation-1 means that my husband’s currency will move in opposite directions 100% all the time. The zero correlation means that the relationship between the two pairs of currency is completely random.
If the correlation coefficient is positive but less than +1, this means that the currency pairs are moving in the same direction but not at all times. If this positive value is close to + 1, this means that both currency pairs will move in the same direction at most times.
If the correlation coefficient is a negative value but less – 1 this means that my currency pair will move in opposite directions but not all the time. If the correlation coefficient is close to -1, this means that the currency pairs are moving in opposite directions in most cases.
So how can you take advantage of the relationship between currencies during forex trading? Well if your speed is increasing or decreasing on the highway due to traffic congestion at times, this will not really reflect the average speed at which you can end the route you go each time you use it. The correlation between currencies is dynamic and may change at any moment. Learn about the relationship over the last few days and then compare it with the degree of long term relationship, say for example last year. If the correlation coefficient in the short term is significantly different than in the long term, this may give you the opportunity to trade … but how? Let’s assume, for example, that the coefficient of correlation between currency pairs A and B of 0.98 last year. This means that both spouses move in the same direction most of the time. As the pair moves to the upside, the pair B is also moving towards the same high speed, but suddenly we noticed that during the week or last month the correlation coefficient between the currency pairs has become 0.10, meaning that both are moving in the same direction but at different speeds. For example, say two cars are moving toward the same destination, but one is running at 100 mph while the other is running at 10 mph. But we can assume that in the end both cars will have to walk fast one. So what do we do? Well we’ll see either of them walk slower and take it.
When we convert this example into currency trading, I assume that my currency pair is moving in the same direction, which was 0.60 over the long term but suddenly this relationship has dropped to 0.20 in the past few days. In this case, we will see who is moving slower and then buy it on the assumption that it will soon hit the other. On the other hand, the other currency pair can be sold if conditions change.
Energy Prices, Inflation and Forex
Oil futures rose to a record high of $ 70.85 on August 30, a day after Hurricane Katrina plunged the Gulf Coast coast of the United States. Although oil prices have fallen in the coming weeks, it is worth considering the effects of rising commodity prices and inflation on the foreign exchange or forex market, especially for the US dollar.
Traditional demand and supply factors have certainly contributed to the long-term upward trend in energy prices. The demand side of this equation has been under increasing pressure this year with a focus on rapid economic growth and the consequent increase in demand for oil in both China and India. However, the recent jump in oil prices can be attributed mainly to speculations related to this hurricane, especially in the futures market, as well as the limited and concentrated refining capacity in the United States on the Gulf Coast.
Economic data released in recent weeks have begun to reflect the effects of natural hurricanes such as Katrina and Rita, which swept through the Gulf of Mexico in the United States in August and September. These data reinforced the belief of the US Federal Reserve that the economy is growing at an accelerated pace, so inflation, not recession, should be a concern.
Employment data for September showed the first net job loss since May 2003, but this month’s 35,000 jobs decline was below market expectations. The consumer price index for the month showed its biggest monthly rise in nearly 25 years. However, when the volatile fuel and food components are removed, then inflation will rise by an average of 0.1%, which is lower than market expectations, as well as the assumption that higher fuel prices have not yet been translated into the basic reading of inflation levels.
Similarly, the September producer price index surpassed its previous forecast for the largest monthly increase in nearly 15 years. However, once the prices of fuel and food items are removed, wholesale prices will rise by 0.3%. However, this fundamental release of the producer price exceeded expectations, so one can conclude that high energy prices began to affect prices at the wholesale level and that it is not a matter of time before the price rises are passed to consumers. Retail sales, which came in below expectations, as consumer confidence fell to a 13-year low, rising energy prices are already beginning to weigh heavily on US consumer sentiment. So the question will be how this focus will be shifted in the retail sector, especially as the holiday season approaches, which is one of the main focus on Wall Street.
After the word “inflation” has become commonplace today, we expect the Fed to continue its policy of monetary tightening. The Fed raised interest rates by 25 basis points to 3.75% in September, its 11th consecutive increase since June 2004. Another hike is expected in October or at least an additional 25 basis points to be approved from November to December.
The rise in US interest rates in parallel with the growth of the US economy has been the driving force behind foreign inflows towards US Treasuries and the Profit Ball stock market, respectively. These flows translate into demand for the US dollar, which kept the greenback strong during September and October. While we can confirm that the stock market at this stage seems somewhat weak, the different picture of interest rates is supposed to make the US dollar attractive until the end of this year.
Rising interest rates and inflation fears are no longer confined to US policymakers or finance ministers from the G-20, which includes some of the major industrialized nations and some developing countries, and are expected to hold a meeting in Beijing this month. According to the statement issued on October 13, the rise in oil prices “may increase inflationary pressures and lead to a slowdown in economic growth as well as instability in the global economy.” This scenario is supposed to support the US dollar also because in times of economic uncertainty, The dollar, which is a “safe haven” currency, attracts large inflows into it. While we may see other countries starting to tighten their monetary policy, US interest rates are expected to remain high in the near future.
The recent move by the Yen Dollar above 115 level bodes well for the USD to gain additional gains within the 118/20 area. On the other hand, the July lows for EURUSD below 1.1868 should be broken below to stimulate further USD gains against the EUR. This move may shift attention towards the 2004 lows at 1.1759 – 78 initially but expectations are heading towards a sharp decline towards 1.1500.
In times of inflationary pressures, the US dollar tends to retreat against commodity currencies. Commodity currencies are the currencies of countries that achieve the bulk of their export earnings through the sale of primary commodities. The most notable examples of liquid commodity currencies are the Canadian dollar, the Australian dollar and the New Zealand dollar.
The dollar hit a 17-year low against the Canadian dollar as oil and metal prices surged. Although the US dollar has recovered from its current lows, the recent gains remain within the corrective range and therefore will likely continue the long term downtrend for the USDCAD. Similarly, the AUDUSD and the NZD are still consolidating below the important resistance lines with expectations of further gains in the short and medium term.
At some point, domestic inflation and the rise in the US dollar will draw attention to the US trade balance deficit as well as the balance of payments. Because US goods and services are becoming more expensive as the dollar rises, so consumers both inside and outside the country will start the event with other, more affordable goods. This is the main reason behind our belief that US stocks are in a weak position at the current stage. The downside risk in the Profit Ball stock market will certainly have a negative impact on the flows towards the US dollar and therefore the long-term downward trend in the dollar’s price is likely to re-impose itself.
The conventional wisdom in the field of financial services suggests that the allocation of between 5 and 10% of the portfolio of investment traders in alternative investments such as those offered by the CFC would be desirable to achieve the necessary diversity and protect the investor from unfavorable movements in the traditional asset class.