Why when a currency makes a move does it make a move across the board?
For example, the USD, why isn’t there one currency pair that just stays still.
The market is moved primarily by banks filling orders. So, if people are spending more money on getting things from Japan, the economy in Japan gets stronger and the GBPJPY goes down.
Secondly, the market is moved by speculators, banks and governments manipulating the price for economic reasons.
Then you have all the interest rates and unemployment, etc.
Because of the amount it is traded & held throughout the world
the USD is THE major currency in the world.
All cross pairs get their price from this, therefore there is a
correlationship between all currencies in the world.
For example GBP/JPY is a cross of GBP/USD & USD/JPY.
Take the prices & prove it to yourself, at this moment.
GBP/USD = 1.6457
USD/JPY = 96.79
Therefore GBP/JPY must equal 1.6457 x 96.79 = 159.28
On your charts you just see GBP/JPY, that’s because the computer
programme calculates all the equations instantly.
This correlationship is transfered to all currencies take a look at
GBP/EUR.
Now when the problems happened in the last few weeks over
instability in the UK government it did not just affect the
relationship between the GBP/USD, but all cross relationships as
well.
So, what is the point in trading crosses if it’s just a calculation. Why not trade the major, which is the actual rate?
But why wouldn’t people just trade GBP and EUR as a separate entity?
What is the point in all the technical analysis on one pair if it’s just a calculation?
What are the ones that are not calculated then? GBP/USD and EURUSD ?
USDCAD?
Doesn’t make sense
If something specific to one currency is moving that currency - such as strong economic data - then you are going to see it move more or less in unison across the board. Think about the math of it. By definition, if GBP/USD goes up because of good UK Retail Sales data (for example), then if nothing else is happening to the contrary GBP/JPY must rise, EUR/GBP must fall, etc. because everything with GBP in it must react to changes in GBP value.
Since the USD is the biggest currency of all, when it moves it moves across the full spectrum in fairly similar fashion. With other currencies the effect can be less noticable.
That said, though, how various related pairs move can tell you a lot about what’s going on. For example, if GBP/USD is rising, but EUR/GBP is holding steady or falling, then the move is probably USD related rather than GBP related.
I’m going to at least partially disagree with daydreamer65. It’s not always the case that the action flows through the USD pairs. They do dominate, but there’s considerable action in the major crosses too, especially within their geographic zones. One needs only think about trade flow to understand why that would be.
So the crosses aren’t calculations at all?
If everything worked like this every currency would just be a direct calculation back to the USD. In effect you are saying the USD is an index and everythin takes it’s rate relative to that. We;;, that just isn’t true otherwise all charts would have the exact same profile.
SanMiguel have you evaluated the calculations involved?
The reason for the discrepencies in the charts not looking
the same, is that some are displayed basically upside down.
Also there is the matter of the pound being 1.62 times the dollar,
a few years ago the pound was 1.5 times the Euro (now at parity)
etc. etc.
Also certain currencies are traded more than others, therefore
their movement is going to be more volatile.
But if you do the calculations you will understand the correlation.
I’m going to at least partially disagree with daydreamer65.
I was attempting to keep it to it’s simplest form a la Phil with
the economics lesson in another thread, but having read the article below…
The United States Dollar is easily the most powerful currency on the market, as it is a part of nearly 90 percent of the transactions that occur daily. As the number one most traded currency, it has 5 of the top 10 most active traders on the forex market.
Another thing to consider is that forex prices aren’t really prices, they’re exchange rates.
Think of it this way… Say apples cost $1, oranges cost $2, and bananas cost $3. We can say the exchange rate of oranges/bananas is 0.66, because you can buy .66 bananas for the price of one orange.
If all the apple trees died from some disease and the supply suddenly disappeared all the apple lovers would have to buy something else. If they all started buying oranges then the orange prices would go up. If oranges went up to $4 then the orange/banana exchange rate would jump to 1.33.
See what happened? Nothing effected the oranges or bananas directly, because only apples were effected by the disease, but that changed the orange/banana exchange rate!!
To a greater or lesser degree all rates are calculations because of the triangles and inter-relationships. If EUR/USD goes up, and GBP/USD does not, then EUR/GBP must rise just on the math. Or if EUR/GBP rises, but EUR/USD falls, then GBP/USD must fall further to keep the cross in line. That’s why if you watch the quotes in relatively quiet times you’ll see one pair change in line with other related ones simultaneously. The broker computers make sure the quotes stay in line, which is why you’ll never see a triangle arbitrage opportunity.
No one currency is an index because at any given point trading could move any one of them, adjusting all the relationships.
Assuming there were no commissions or spreads…
If I had �10 (GBP) and wanted to swap them for USD at 1.6, I would get $16.
Now, If I instead swapped my �10 for yen, and then changed the yen to AUD, and then I changed them again to Chf, and then to $, what you are saying is I would still get $16. That doesn’t make sense as all these exchange rates should be traded independently. If they are not traded independently then there must be some index somewhere that is being used to calculate them?
Why do we trade crosses at all if they are not true reflections of the market moving in certain directions?
Why not just trade EURUSD and GBPUSD?
So, which currencies are the only true traded currencies?
Surely the answer is all of them because people and traders exchange their money for others. If what you’re saying is true then there must be at least 2 currencies that all the others are then calculated on.
I guess the question is why couldn’t you trade them separately. In principle say 1million traders held $1m. These traders only trade GBPUSD and EURUSD. They decide they are going to buy $0.5m of GBP therefore pushing the GBPUSD up. At exactly the same time, they sell 0.5m euros. You are saying that in the case the market would not move at all. So, is it the amount of money held by the banks in USD that controls the rate? If so, when was the original calibration done to work out the rate?
Also, why would we get S&R points at all? If it’s merely calculated by banks filling orders for country trade why wouldn’t it just be haphazard?
I know we’re getting into some “philosophical” stuff here - I don’t believe it’s central to being able to trade, I’m just interested.
GBPCAD - that a cross? If so, wouldn’t be better trading GBPUSD and USDCAD separately.
Yes, you would get $16 back. How could it be otherwise? $16 must equal the equivalent of $16 in any other currency. Take a snapshot of rates at any time you like and do the math. You’ll see it works out. It must. If it doesn’t, then there’s a miss alignment somewhere that can be arbitraged.
Exchange rates, as was noted earlier in the thread, are relationships. As such they cannot trade “independently”. The rates are by definition dependent. You can only value USD in terms of something else.
Why do we trade crosses at all if they are not true reflections of the market moving in certain directions? Why not just trade EURUSD and GBPUSD?
If rates move they are not “reflections” of movement, they are the market moving - the relative value relationship between currencies changing. That is was forex is all about.
I do wonder SanMiguel if you are not just having a great big
laugh at our expense?
Have you done the math?
Any pair which isn’t paired with USD is a cross pair.
GBP/EUR, GBP/CHF, EUR/JPY etc. etc. all cross rates.
But one more time just for fun, if you trade GBPUSD & USDCAD it
is 2 trades, whereas trading GBPCAD is one trade. You are also
paying 2 spreads, compared to one.
Also you need to get the trade direction for the 2 trades correct.
Not I’m not honestly.
What I’m trying to get my head round is how the rate is worked out. For their to be a ratio…an exchange rate…there must be a comparison of 2 amounts. Is it the total money all banks hold in one currency in their currency compared to another or what? So, what was compared originally to get the ratio?
if you trade GBPUSD & USDCAD it
is 2 trades, whereas trading GBPCAD is one trade. You are also
paying 2 spreads, compared to one.
No, I’d trade GBPUSD for an order,
USDCAD for an order, and
GBPCAD for an order. All separate trades with their own S&R and independent broker spreads
Once upon a time currencies were valued in physical goods like gold and silver. To some degree that is still the case. You can still express a currency in gold terms, or oil terms.
Better or worse,
The Swiss franc was for a long time the only currency left that was backed by real Gold (Gold-franc), meaning 1 SFR = 1 GoldFR and the gold was there physically.
Was a big deal when the Swiss Government gave up on it but I think that’s why the currency is still a player in the FOREX market.
