I need something explained about Eur/Aud, please?

[BigPipGrabber]

Yesterday, Jan 27, 2015, Aud released their Consumer Price Index. It went down 6%. I read the economic calender from FXstreet, as long with a few other sites. They said a higher number is bullish while a lower number is bearish. The CPI is now 1.7%. Looking at Dukascopy charts and their mapping of previous news releases, I saw charts that made sense.

The question is, can someone tell me why Eur/Aud fell? The CPI fell for AUD, which I thought should be bad for Aud, and has been in the past. Yesterday, Eur/Aud fell when the dropped CPI was released. What made it go in Aud’s favor?

Is this number correlating with some planned interest rate, and its great evidence for them, or something along those lines?

[Kevin_LaCoste]

This is just a theory of mine, but I believe some institutions use news events to capture the liquidity spike from news traders for their own orders. So in this case, even though the news was bearish for the AUD, some “big money” saw this as an opportunity to buy from the news traders going short, and accumulate some AUD.

So in this case, when the AUD refused to fall due to a few institutions gobbling up news traders
shorts, a few news traders may’ve started closing their shorts at breakeven. This is the start of bullish pressure. Other news traders with close stop losses then get stopped out, making the AUD rise even more, triggering even more stop losses. Now that there’s blood in the water, other traders will dogpile in and hurt any other short-selling news traders still in the market. And finally, short-term trend and breakout traders may see a bullish trend / breakout forming on their chart, and open some longs.

This is all speculative on my part, but the only people who can trade [I]against[/I] the news would be those with deep pockets, and probably a long-term perspective. Maybe they think the AUD is cheap, or they needed alot of AUD for their clients immediately, and this news event presented a good opportunity.

Just my 2c.

[TheLastBear]

News trading is not often as straight forward as it appears on paper. You need to always pay attention to both currency pairs and sometimes what happens in one economy trumps the impact witnessed in another. Just some food for thought.

[PipMeHappy]

Hello BigPipGrabber, and welcome to our forums.

What KevinLaCoste and The LastBear say is very valid: indeed, the art of understanding not only the impact of news releases

on the two currencies within a pair, but also how the news item is manipulated by institution to acquire or liquidate ‘stock’,

is very complex and indeed treacherous.

To answer your question, I wondered how best I would approach this myself: as for my own trading with synthetic pairs,

like the EUR/GBP, I have learnt that currency correlation is a great aid, although it can work better on longer-term than

on shorter-term trading objectives: given that EUR/AUD is a pair made of the ‘fusion’ of EUR/USD and AUD/USD, it pays

to put the three charts in the same screen and compare how they move in relation to one another, over time:

You can see how, with minor deviations, EUR/AUD moves as a mirror image to both AUD/USD and EUR/USD: bearing

in mind that this is a monthly chart, encompassing many years of price action, it is still giving truth to a strong negative

correlation between EUR/AUD and AUD/USD. However, when dealing with shorter-term moves, especially when trading

the news (e.g. on a five-minute chart), this correlation may break and the two pairs may move not in opposite directions

but in tandem, which is why I prefer looking at longer-term charts when seeing how the ‘correct’ correlation relationship

is working over time.

If in doubt, use the currency correlation map by Oanda, for example, to see how EUR/AUD’s correlation is holding with

regard to its ‘root’ pairs, EUR/USD and AUD/USD:

Forex Correlation | Currency Correlation Chart | OANDA fxTrade Europe

Here is a screenshot from it:

The map shows that, on a monthly time-frame, EUR/AUD has a very strong negative correlation to EUR/USD at the moment,

but on the same time-frame there is a very weak relationship to the AUD/USD… This tallies with what you may have

witnessed yourself, i.e. expecting EUR/AUD to go up when AUD/USD went down, but there being a slight divergence in

‘normal’ correlation.

I hope this helps…

PS: the chart was from my FXCM web-based trading station.