Disentangling currency pairs

Many a new trader will find listen to the news about which currency is doing well or badly. For example the news might say that the US Dollar strengthened, or something like that. Most of these news reports do not say how they know what they are reporting.

Traders would normally be setting their brains against currency pairs e.g. USDJPY, or GBPUSD and so on. This is a ratio of one currency to the other. A ratio cannot be representative of one currency. However, there is a little trick which I referred to in the past. It’s about looking at one of the currency pairs across several. For example if you want to know if the Yen (JPY) is strengthening or weakening then look at several currency pairs for patterns. So – look at USDJPY, GBPJPY, NZDJPY, AUDJPY etc. The chart below (clickable and scrollable) shows that the Yen (JPY) has had a big influence on movement of the pairs.

This means that a trader can make an estimate of where price might go based on one currency. Of course if playing AUDJPY (in the chart), a comparison of  all AUD pairs would be useful. It may be that based on such estimates a trader decides to play an alternative such as AUDNZD, after assessing all NZD pairs.

In another scenario after careful assessment, a trader could decide that because AUD is weakening and JPY is also weakening at, then there is likely to be a fall off in volatility – that all important ingredient for taking a chunk out of the markets.