Today when the NFP came out, which was obviously bad for the UD$, I noticed some moves I couldn’t quite understand.
The Majors, AUD, EUR, GBP, all we up about 40 some odd pips. That was expected. HOWEVER!!! The EUR/JPY went up over 100 pips! Why a cross pair going up so much on the US NFP? This, I just don’t understand.
mtdavs,
The price action during the release of NFP is always USD-driven. That accounts for virtually all of the price movement you observed in the majors (USD pairs) this morning. When the dollar is driving the market, what drives the EUR/JPY? The answer is the EUR/USD and the USD/JPY. Let’s take a close look at these three pairs.
The EUR/USD, USD/JPY and EUR/JPY must move in lock-step (plus or minus a pip or two) — otherwise, traders will instantly seize an arbitrage opportunity and bring them back into lock-step.
Here is the relationship in this case: EUR/JPY = EUR/USD x USD/JPY, give or take a pip or two. This morning, during the NFP release, the USD weakened against the EUR and strengthened against the JPY. Here are the numbers:
------Time-------EUR/USD--------USD/JPY--------EUR/JPY----------EUR/USD x USD/JPY
----8:30 am-------1.2679---------96.69----------122.76—<compare>—122.59 *
----8:35 am-------1.2734---------97.08----------123.64—<compare>—123.62
----9:45 am-------1.2745---------97.96----------124.87—<compare>—124.85
Times are EST. Prices are Open as read from 5-minute NetDania charts.
Note the large disequilibrium (17 pips), marked by the asterisk above, which occured momentarily at 8:30am, and was corrected (arbitraged) before 8:35am.
By the way, the 100-pip move in the EUR/JPY which you asked about was only half of the 200-plus pip move which occured between 8:30 and 9:45, all of it explained by the action in the EUR/USD and the USD/JPY.
Good trading,
Clint
MT,
The US dollar is basically the base currency of this market. In one way or another, all major currencies are valued against each other based on thier value to the dollar. Dollar kinda replaced the gold standard post WWII and was completly abandoned by the Nixon administration. Google or Wiki it, it should help you understand. The previous poster was right, I just thought I’d add a little.
gobreeze
MT,
I also wanted to add that just because the NFP# was “obviously bad” dosen’t mean the market will react that way. I think surprises move the market more then actual #'s.
The noise that follows a major USD dollar release can be brutal for dollar traders and cross traders. So I take NFP days off from trading to go fishing.
gobreeze
gobreeze,
Thanks for your reply. I take exception (slightly) to what you said about the U.S. dollar. Although it’s true that the USD plays a powerful role on the world currency stage, nevertheless, fixed mathematical relationships would apply to all currency pairs even if there were no U.S. dollar. Let me try to explain.
The relationship among ANY three individual currencies is defined by specific mathematical equations. These equations hold, whether the USD is involved or not. And these equations can be violated only momentarily, before market forces will arbitrage the imbalance, and restore the equations.
Here is the general case. Suppose you have three currencies: A, B and C. Those three currencies can be paired three ways: A and B can be paired, either as A/B or B/A; B and C can be paired, either as B/C or C/B; and A and C can be paired, either as A/C or C/A. We don’t get to choose the way they are paired — that’s dictated by some quasi-government organization in Switzerland. Let’s say the gnomes in Switzerland have paired these three currencies as A/B, C/B, and C/A. Immediately, we know the following facts:
A/B = C/B divided by C/A
C/B = A/B times C/A
C/A = C/B divided by A/B …just like in high school algebra class.
Re-writing these three equations in a more algebraic form, we get:
A/B = (C/B) / (C/A)
C/B = (A/B)(C/A)
C/A = (C/B) / (A/B)
At this point, prove to yourself that these algebraic equations are correct.
Next, let’s use real currencies, instead of A, B and C. Let’s say that A = CHF, B = JPY, and C = GBP. Notice that the USD is not involved in this example. Our three equations now read:
CHF/JPY = GBP/JPY divided by GBP/CHF
GBP/JPY = CHF/JPY times GBP/CHF
GBP/CHF = GBP/JPY divided by CHF/JPY
A few minutes ago, I noted the following current market prices for the three currency pairs in this example:
GBP/CHF = 1.63517, GBP/JPY = 139.158, and CHF/JPY = 85.080
I’ll prove the first equation for you: CHF/JPY = GBP/JPY divided by GBP/CHF
substituting actual prices, we get: 85.080 = 139.158 / 1.63517
which resolves to: 85.080 = 85.103 (close enough)
You can prove the other two equations with a pocket calculator. And you can experiment with other combinations of currency pairs to prove the following rule to yourself: Any three individual currencies make up three unique currency pairs, and the market prices of these three pairs are related to one another by specific mathematical formulas. When these formulas are temporarily violated, the market quickly corrects the disequilibrium through arbitrage, and restores the formulas. This rule applies whether or not the USD is one of the currencies involved. In fact, if the USD ceased to exist, this rule would apply to the remaining currencies.
Sorry for the long-winded explanation.
Good trading,
Clint