Questioning the relativity of currency pairs

Beginner Questions
1

Hey guys,

Just need a hand to see if my brain is heading in the right direction. My question is: Is there any influence on a currency pair if another currency pair (with a shared currency) has a change in value of the non-shared currency.

My example:

If AUD/NZD falls by 100 pips based solely on the weakened value of AUD (therefore AUD falls 100 pips in relation to NZD, NZD increases by 100 pips in relation to AUD), will that relative increase of NZD affect, say, the NZD/USD currency pair?

Will that relative value increase of NZD also affect its value relationship with other non-AUD currencies, and if so, how significant is it?

Thank you!

1 Like
2

The answer…

It depends. :slight_smile:

The global financial market is a complex interconnected system so it’s very rare that something (like AUD) moves in isolation.

Let’s take your example. If AUD/NZD falls by 100 pips over the weekend? WHY did it fall? Was there a catalyst? Or some sort of exogenous event? Depending on what caused the price move, you can then see if it’ll have an effect on NZD/USD as well.

Here’s a very simplified example. Let’s say over the weekend, China’s economy crashes. Since Australia exports a lot of stuff to China, this would be very bad for them relative to New Zealand. So AUD/NZD would fall. But New Zealand also exports stuff to China, so NZD/USD would probably drop as well.

And if the crash was really serious, then there may be panic globally and capital may rush back into the U.S. which would cause USD to rise against other currencies.

3

Hi tom
Yes there is a such a thing

GOOGLE “CORRELATED CURRENCY PAIRS”

I personally use this method
now… don’t go and use exactly what i use , because you need to find your own style

but when i trade Currency i like to trade EUR AUD
now, how you set the correlating pairs up VISUALLY is important

Example
i will use EUR AUD / GBP AUD / AUD USD / AUD CHF

AND i’ll lay them out as follows

Note : I have 2 monitors that are one above the other

THE LINE INDICATES THE SEPARATION BETWEEN THE TOP AND BOTTOM MONITORS

EUR AUD H4 GBP AUD M30 EUR AUD M30

                                  GBP AUD  M1         EUR AUD M1

EUR AUD H1 AUD USD M1 AUD CHF M1

                                AUD USD M30          AUD CHF M30

EUR AUD M1

EUR USD M15 [EUR AUD M30******]

SO CAN YOU SEE WHAT’ I’M DOING

as early warning I AM CLUSTERING THE M1’s together
the idea is

IF EUR AUD is going UP
then GBP AUD Must be going UP
and
AUD USD and AUD CHF MUST BE GOING DOWN at the same time

if they are not I DO NOT ENTER A TRADE ON THE EUR AUD
i want to see them (lets’ call it… IN SYNC) on both the M1 and M30

However , i actually trade off the H4
and i use the M1 and M15 as early warnings for a better entry

but for a bit of a faster view on the H4 i use that main window at the bottom , the big one… the M30

Each chart has, Not only Jap candlesticks, but Heiken Ashi Candlesticks and MACD as well as 2 Bollinger Bands (1 at 2 SD and the other at 3 SD)

in conjunction with this, ON THE HIGHER TIME FRAMES ONLY, i use Fib Levels and Pivot Points

this is what works for me
I have very strict rules and they always work for me and i profit overall from this system

Now. if you were to ask me to keep all the indicators but only use 1 Chart and Just rely on that
I’d have to honestly say that without the correlating pairs, it would certainly be harder

you can test this setup if you like to understand how pairs correlate
have fun

4

Just go and overlay on a single chart both GU and EU - you’ll see what your looking for.

You’ll also notice cross currency divergence - a useful type of analysis when considering correlated currency pairs.

5

Thank you ForexGump, Martin, and RISKonFX for your answers

So, the answer is:

On a larger scale, value changes in single currencies that are significantly fundamental in nature can have notable impacts on currencies that are fundamentally/economically tied to the currency. This would be good to look out for when doing your fundamental analysis.

There are also currency correlation pairs that are tied to all price action modifiers (technical, fundamental, sentiment) that should typically be checked when analysing potential trades. It would be a great idea to check correlated pairs to see if a potential trade would trade into areas of interest (SR lines, fib/pivot points, EMAs) as that could halt/invalidate trade setups.

Looking at correlated pairs (GU/EU), they’re largely tied together, though the divergence in the charts must be due to the non-correlated currency

Honestly, I’m baffled at how even though all the pairs are so correlated with one another, how technical analysis can still be largely successful especially given that if you predict a single currency to rise/fall in relation to another, how that will make change on other correlated currency pairs. Although, I wouldn’t be surprised to see, say, GBPUSD stop in its tracks during a sound technical analysis long/buy trade setup for the sole reason that GBPJPY hit a confirmed resistance line. And that’s only the TECHNICAL analysis.

If you’re not laughing, you’re learning!

Thanks guys, lesson learned!

6

I also want to ask how the impact of one’s correlated currency pairs can impact the correlated currency pair of a pair that is correlated with both, but I really don’t want to get into such a difficult idea.

So, from a price action only point of view:
Yes, EURUSD will effect USDJPY but how, if at all, will the price action of EURUSD effect, say, AUDJPY given that they share a link with USDJPY which is affected?

I have no idea. :confounded:

7

Hi Tom, below is a link to a FREE Currency Strength Meter (web), this will enable you to overlay the 8 major currencies and see the impact they have on each other over various TF’s. You can zoom in using the slider in the date bar below the chart.

http://megatrendfx.com/additional-forex-indicators/currency-strength-meter-indicator

If you don’t already have access to a CSM, Hope this is of help.

8

well ok
if EUR USD was to lose strength (meaning USD gains strength)
this may cause the JPY to lose strength ( keyword… MAY)
assuming it does

if you are trading AUD JPY then it would an indication that AUD may be going up.

Now. this is a very black and white example and things in reality are not exactly like this and more things need to be considered

all i’m trying to demonstrate here is… they still have a relationship but a more DILUTED RELATIONSHIP when transferring to other pairs like this

9

Perfect - thank you to both of you!