Fusion Markets

The foreign exchange pair USD/CNH (or otherwise known as USD/CNY) is the trading ticker symbol for the powerful but volatile pair of the United States dollar and Chinese Renminbi. Chinese Renminbi is the official currency of the People’s Republic of China, but each individual unit of currency is called Yuan. These two are considered as “exotic” or volatile pairs, mainly because a major currency, USD, is paired with that of an emerging nation, CNH.

While considered volatile and generally treated with higher liquidity, the USD/CNH pair is the combination of the world’s two largest economies. The unique relationship between the two countries of the two currencies makes the combination both potent and fascinating.

CURRENCY BACKGROUND

United States Dollar

The United States Dollar is the official currency of the United States of America and several other countries. It is popularly known as the “greenback” due to the bills’ predominantly green color.

The Coinage Act of 1972 paved the way for the introduction of the US dollar. The fiscal policy of the United States is under the control and supervision of the Federal Reserve System, which serves as the nation’s central bank as well.

Chinese Yuan

The Renminbi is the official currency of the People’s Republic of China. The Yuan is the basic unit of the Renminbi, but it is also used to refer to the currency in general, especially in an international context.

In 1948, or one year before the establishment of the People’s Republic of China, the People’s Bank of China (PBOC) introduced the Renminbi. As the new government of China expanded its hold on its territories, it began to steadily issue the Renminbi so as to have a unified currency in the land. Since then, the Renminbi, or Yuan, has been in circulation and has been the official currency of China.

IMPLICATIONS OF USD/CNH CURRENCY PEGGING

The US and China have always had a love-hate relationship that greatly affects not only their trade relations but that of the world as well. The past decades saw a series of pegging and de-pegging between the two currencies. Here are a few key periods that saw the biggest impact and highlighted the importance of currency pegging.

1995-2005

The US Dollar is freely convertible into all currencies of developed economies. On the other hand, the Chinese government is managing the Chinese Yuan’s value. From 1995, Chinese Yuan was at a “hard currency peg” at 8.38 against the US Dollar. For a decade this seems to be the case, and for this reason, it received wide criticism, mainly from the US government. The expectation that there should be a movement in the currency exchange of Yuan (given that China’s economy saw big growth) was not seen. This move by China is seen to protect its interest as, by artificially keeping the value of the Yuan down, Chinese importers were given a competitive advantage: a lower Yuan exchange rate reflects a stronger Chinese currency because you would need fewer Yuan to purchase one US Dollar.

2005

July of 2005 saw a revaluation of the Yuan by the People’s Bank of China by 2.1 percent. PBOC likewise announced a shift to a “soft peg,” which will allow the Yuan to trade more freely within a certain managed exchange rate range. While some criticized the change for being too “insignificant,” many economists praised the move and saw it as the first step towards a more flexible currency exchange system.

2010 - present

Since 2010, China continued its efforts of reforming its exchange rate system by giving the buying and selling forces in the market a freer reign in determining the exchange rate.

IMPORTANT THINGS TO CONSIDER WHEN TRADING USD/CNH IN FOREX

Federal Reserve and People’s Bank of China

Federal Reserve

The Federal Reserve, or most commonly known as The Fed, is the United States’ central bank. It is responsible for the monetary policies of the nation and sets the interest rates of the dollar investments eight (8) times in any given year. The Fed provides direction to strengthen the US Dollar and in maintaining its fluidity and stability.

People’s Bank of China (PBOC)

PBOC is China’s central bank. It has the duty of implementing monetary policies – even unconventional ones – to ensure that CNY remains competitive and afloat. PBOC likewise sets a daily midpoint rate, which serves as a basis in trading Renminbi or Yuan within 2% in either direction.

Trade Wars

Being major players in the international trading arena, trade wars in the form of imposition of additional tariffs and sanctions greatly affects the values of the currencies. In the 2018-2019 US-China Trade standoff, when Trump imposed a series of sanctions against China’s products and exports, China retaliated by lowering the exchange rate value of CNY below its USD peg.

USD/CNH Weekly - Nov 2017-2018

CONCLUSION

Is the USD/CNH worth the risk for your investment?

As a volatile combination, is it worth the risk to invest in USD/CNH?

While it seems counterintuitive, the pair remains to be one of the most popular, given that the combination represents two of the most powerful economies in the world.

The US Dollar is the world’s primary reserve currency, and remains to be the most widely used currency when it comes to international transactions. The Chinese Yuan represents the continuous and rapidly rising economy of China, the world’s largest exporter. Their advantages when taken individually could be the pair’s strength when taken cumulatively.

The Forex symbol NZD/CAD indicates the exchange rate value between the New Zealand Dollar (NZD) and the Canadian dollar (CAD).

Currency background

The New Zealand Dollar (NZD)

The New Zealand dollar has been New Zealand's official currency since 1967. It is also used by the Cook Islands, Niue, the Pitcairn Islands, and Tokelau.

Before NZD emerged as the country's official currency, New Zealand used the New Zealand pound. It should be noted that it differs from NZD and the sterling pound. The government researched using a decimal currency, eventually leading to the use of NZD.

When NZD was introduced, 27 million worth of banknotes and 165 million in coins were produced. The currency is also known as the kiwi, after the bird native to New Zealand.

The Canadian Dollar (CAD)

The Canadian dollar (CAD) has been Canada's official currency since 1858. It uses the typical dollar sign ($). You will sometimes see it as CAD, Can$, or even CA$. These variations are meant to distinguish it from other currencies that use the dollar name. Like other dollar denominations, such as NZD, it is a decimal currency.

CAD is pretty popular, holding the fifth most chosen reserve currency. Of course, USD dollar is at the top, followed by the EUR, GBP, and JPY. CAD is also the sixth most traded currency because the country has a lot to offer in terms of raw materials and natural resources.

Factors you need to consider in trading NZD/CAD

Most currency pairs depend on similar factors, such as economic trends and geopolitical factors. Your wins and losses will depend on the countries your currencies are from.

Here are some factors that drive the NZD/CAD dynamics:

Economic and geopolitical conditions are the most significant factors that affect NZD/CAD as a Forex pair.

Economic conditions

When considering the NZD/CAD Forex pairing, you may want to take special note of Canada's strong economy. It is a mixed one, with over 70% of it relying on the service industry.

It is worth noting that in 2020, the country was considered to have the world's ninth-largest economy, with almost USD 1.75 trillion in GDP. It even places third worldwide in terms of oil deposits. There are many other raw materials the country can also export.

Meanwhile, NZD has recently (at the time of writing) experienced a surge, with its economy rising faster than investors expected. The second quarter of 2022 has seen it grow by 1.7%. The rally did not last long, and more recent stats show it is now fizzling. However, considering the 0.2% drop during the first quarter, NZD is still headed in the right direction.

Because New Zealand is very close to Australia, observe how their economies are also closely interrelated. A lot of New Zealand’s exports may be going to its neighbour.

As a Forex pairing, NZD/CAD is reliable enough. It may not involve the ever-popular USD, but CAD is a reliable currency, and NZD is also proving its worth. One must, of course, at least show some predictable up-and-down motion for you to profit from this pair.

Because both Canada and New Zealand are known for their oil and other commodities, you may also want to do a lot of commodity price watching before you make a trade.

Geopolitical conditions and global risks

Canada does very well politically. It is known to have one of the least corrupt politics in the whole world. That fact makes it a steady country with a reliable economy.

Meanwhile, New Zealand is generally known as a peaceful country. Still, it is difficult to deny that current global tensions have affected the currency. NZD's value lowers as the tensions and the prices soar, an effect felt long after the COVID-19 lockdowns.

Despite NZD issues, local exporters benefit from lower NZD value.

Perception

How each of these economies is perceived also plays a role in how each performs. Traders want to invest in something they can trust and predict. For example, Canada is generally perceived to have clean and non-corrupt political practices. It also continues to deliver high-quality raw materials and natural resources. Both these factors play a big role in the currency's perception.

How to trade NZD/CAD

When trying to profit from this particular Forex pair, do so during the optimum times: from 13:00 and 17:00 (GMT). Why? It is at these hours that the NZD/CAD is at its busiest. Be careful. Trading when it is at its volatile is risky, while trading when it is not volatile will have you spending too much.

A number of other factors will also influence the volatility of this pair, for example, the CAD exchange rate can be affected by the US’s economic conditions. Meanwhile, the NZD is affected by Asian and Australian markets.

Conclusion

Is the NZD/CAD pair worth going into?

The NZD and CAD pairing does not involve the USD, the most sought-after currency. So, it does have that against it.

However, CAD is reliable enough. It is one of the world's most-held reserve currencies, coming from a stable country with perceptibly good politics and many resources. So, you can trade this pair with the knowledge that you can, at least, rely on the CAD.

The combination with NZD is near perfect because the New Zealand currency may be experiencing some issues, but it is still generally more reliable than many other currencies. It is the 18th most used currency, from a largely peaceful country. The ups and downs it is currently experiencing may ultimately benefit traders. After all, you want to profit from the trade and not work on a pegged, static currency.

So, it is worth checking NZD/CAD if you want to diversify your foreign exchange portfolio. You may still have another pairing with USD involved, but the NZD/CAD pair is worth checking out.

Hi Traders,

By popular demand, we wanted to share our top five most used tools and features that are provided to you for free in our client area.

These are a bit like my Top Five Tools for Traders, but these are a little different as they're all internal rather than other websites or companies. 

Here are 5 of the most popular tools (in order) our clients are loving:

#1 - Analyst Views by Trading Central. This is my personal favourite. You can view it in the hub now, download it and use it as an indicator on MT4 desktop (in "Downloads on Hub) or visit your "News" tab in MT4 where it's constantly updated too.

#2 - The Economic Calendar is a must too. Are you using this already? If you're trading and don't know what announcements are coming up, you could easily be blown away by a big move and have no idea why. My favourite is that it will show you the historical price impact of previous announcements. You can even save the future events as a calendar invite!

#3 - News Tab - Knowledge is power. You know that already. You might already have your own news sources which are cool, but with Fusion's news tab, you can create a personalised feed (e.g. only show me EURUSD) or see what's most popular for others. Don't be an uninformed trader.

#4 - Sentiment - I love the idea of knowing what the crowd is bullish or bearish on. What are people talking about? Why are they talking about it? Check out our post on why this is important.

#5 - Technical insight is excellent if you'd like to go into a deeper dive on technical analysis on Forex and Indices. I prefer these charts over MT4 truth be told and want to know short, medium and long term outlook for each trade I'm considering.

That's it for now. We've built these for you and believe they'll truly help you excel as a trader.

#6 – Historical and Live Spreads Tool - with this tool, you can see how spreads have fluctuated over time, as well as the current live spreads. This information can be incredibly valuable in helping you make informed decisions about when to enter and exit trades. No more surprises, no more hidden fees – just transparent, competitive pricing. Read our blog post to learn how spreads actually affect your trading costs. 

Much of what we write about in these articles is about the mindset and behaviour of traders and trading. The reason for this is quite straight forward; it's because it's the decisions that we make and take that will ultimately determine how we perform as traders.

Yes, of course, price changes in the markets will play their part but, in the end, it's our decision whether to get involved or not and that determines how much capital we commit to trade, how long we hold the position for, and what the ultimate outcome of the trade will be.

Hidden costs

When we examine the costs of trading, we tend to focus on commissions and spreads and our PnL, but there are other costs, costs that we don't consider when really, we should.

These are the costs of inactivity and indecision, the costs of listening to outside influences more than to your own inner feelings and intuition. They are the costs of missing out, what economists call "opportunity costs".

Self-doubt among traders is not unusual, and in truth, it's better to exercise a degree of caution than to be 100% confident about everything you do. Hubris has been the downfall of many traders, and we certainly advocate being prudent with your risk. That said, It's always worth testing your thinking and assumptions and checking that they are still valid before you trade.

The problem comes when you start to talk yourself out of the trade entirely. After all, trading is a risk and reward business. There can be no profit without the possibility of loss.

A trader's job is to try and ensure that the risk that they take is in proportion to the potential rewards they could make. Not taking that risk could be limiting your potential as a trader which in turn may be limiting your rewards or returns.

Moments of clarity

Sometimes as a trader or investor, you will enjoy a moment of clarity, a moment of pure thought and insight, in which you can see exactly how a market setup or situation will playout. Moments when you just know you are right

If that moment of clarity coincides with significant moves in the markets, then that can be a very valuable situation indeed. But only if you act on it.

Allow me to tell you a personal story. During the great 2020 downturn in oil (where a Saudi/Russia price war caused prices to go NEGATIVE), I found myself holding oil from $30 a barrel and riding it all the way down watching in sheer horror. I kept buying the dip. How much lower could it go, I thought? I ignored every rule and everything I've written in the past about this. I didn't put a stop loss on. I told myself it was a long-term trade that I would stay in forever. Prices surely couldn't go below $20. That's madness. Then… The unthinkable happened in the futures price – it went negative.

Thankfully, Fusion's price didn't go negative (we use Spot Crude oil) but with spot prices at $15, I was sitting watching Netflix on my couch, and my heart raced as I saw it go down like World War III just started. The news sites told me nothing new had happened (funny how we search for any narrative to make sense of it all). Here it went. $14. $12. $11. Back to $12. Back to $11. $10. $9. Thoughtful me knew these prices were unsustainable. I told myself I would hold until it hit $0 if it had to. My account was down 70%. I'd never suffered such steep losses. I felt sick. I then couldn't sleep. I woke up, and it was still down a lot but had recovered from $7.

Watch out for the narratives.

I started to read more about what others were saying. What the hell was going on? Would this happen again? Yes, there was nowhere to store the oil (so the narrative went) but surely rationality would prevail. Seriously, how could you have negative prices? It was impossible to find anyone bullish in the media or otherwise. People assume if something just happened, it will occur again Goldman came out and said to expect more negative pricing. But I just couldn't believe it was so cheap. I knew it was time to buy more!

But then I didn't buy it. I waited for another opportunity for when I knew "the worst was over" I was so sure things would bounce back, but I didn't have the guts to buy one more time, and the opportunity passed me by forever. I let the external narrative cloud my previous judgement. But I was just so worried I couldn't think properly. Within days, it had doubled back to $15 a barrel. Then it was $20 a week later. At the time of writing it is $40 a barrel. By the time you read this, it might be $60 a barrel. Who knows? All I knew was fear and too much outside influence completely warped my view, and I failed. I just wanted to survive the calamity. While I survived to write you this, I did not do as well as I could have.

Self-belief

People often talk about having the courage of their convictions, but in trading, it's not really about courage, it's about belief, belief in yourself and your ideas and be prepared to back them, rather than talking yourself out of them, or allowing yourself to be talked out of them by others.

We all like to take advice and read and hear the opinions of so-called experts. But the absolute truth is that nobody really knows what going to happen next in the markets.

For example, nobody was predicting that an 11-year bull market in equities was going to end and end so abruptly in Q1 2020. Or that US unemployment would spiral to +14.7% in a single month.

Do not get me started on the rebound from the lows in March. To be bullish on the markets in April and May of 2020 was to look like you had lost your mind given the narratives surrounding COVID.

So-called "market legends" like Druckenmiller and Buffett told everyone it was not the time to buy. Sadly, so many would have listened.

Let's not forget Yogi Berra's famous saying "It's hard to make predictions, especially about the future" which is why it's best to take these so-called forecasts with a grain of salt. The best that any expert can do is to make a prediction or forecast about the future. And the longer the time frame that the forecast is over, or the more unusual the circumstances under which it is made, then the more significant the room for error and the higher the chance that they are simply wrong.

Loss aversion

As humans, we are subject to subconscious emotional biases that can cloud our decision making. One such bias is loss aversion.

Loss aversion can hamper a trader in two distinct ways. It's most commonly associated with the practice of running losses, ignoring stops and breaking money management rules when a trader can't or won't accept that they were wrong and refused to close a losing position.

The other way that loss aversion can muddy the waters is in our initial decision making. You see as species we are poor judges of risk and reward; we don't calculate probabilities very well, and the upshot of this is that we do not like uncertainty.

To the extent that when we are faced with situations that have a series of potential outcomes, we tend to favour the outcome with the highest degree of certainty. Even if that outcome is the least beneficial to us financially. Which, of course, is the exact opposite of the risk versus reward culture that we spoke about earlier.

Fortune favours the bold.

Though we might not like to admit it, our subconscious is often trying to talk us out of taking risks. Outside influences from the media, fear, our aversion to loss and a preference for certainty may often be our worst enemy as traders.

As Howard Marks said, "If you're doing the same thing as everyone else, how do you expect to outperform them"?

There have been several once in a generation trading opportunities over the last six months. I wonder how many of us were bold enough to seize the day and take advantage?

 I’ve been in this industry for over a decade now and have been in a very fortunate position to learn a lot by watching others. I’ve seen the good, the bad and the ugly by watching tens of thousands of traders across various brokers.

Let me start off by saying that I am by no means perfect and I have (even recently) done quite a few of these myself. But knowledge is power, so I wanted to provide my observations of where things can start to go wrong, based on my own experience of sitting on the sidelines.  

1.      Ignoring Basic Risk Management aka Trading too big for their accounts

I have to start with risk because I believe it’s THE most important concept.

"Risk is what's left over when you think you've thought of everything" 

Unfortunately, risk management is not sexy, however. It makes people fall asleep when you hear someone talk about risk management.

Risk can mean many things, but it’s especially prescient when it comes to Forex Trading due to the leverage that’s involved. Unfortunately, it’s a gift and a curse.

I always tell traders that leverage is like driving a fast car. It’s nice to know you’ve got that power if you want to use it. And most of the time you don’t want to (nor should you) drive 100km/h on a busy street.

That is how I best describe the use of too much leverage.

It’s great that you have the flexibility with it if you need it, but you shouldn’t be maxing out the margin on every trade. It gives you less flexibility if the trade goes against you and kills way too many traders too soon.

I’m not a big fan of martingale systems and have seen this ruin many traders; however, depending on the circumstance, I do enjoy averaging into a trade. After all, if I liked buying EURUSD at 1.1000, wouldn’t I also like it at 1.0960 where I’m getting a lower average entry?

Many forex education providers will advise you never to risk more than 1% on any trade, and this can be good advice, yet I’d say more than half of traders I’ve seen will routinely trade at least 10x that. Some will even come close to margin call triggers on the first trade. Frankly, this can just be like lighting money on fire.

It might not be as “fun” to trade when it’s so small. But if you’re getting too excited by it all, maybe you’re taking on too much risk.

2.       Too many trades/ Trading outside of the area of competence

A close cousin of too much risk is taking too many trades, or branching out into other areas.

There’s a reason that doctors specialise in one area. You’d probably be scared if you saw an eye doctor have a go at performing surgery on the brain.

Stick to just a handful of products at the time (I’d say a maximum of five, preferably three). If there is a correlation between them, that’s fine but don’t assume your knowledge of the yen will mean you’re a great trader of the Turkish Lira.

In most investment banks back in the day when they had large proprietary desks, traders would only stick to a few currency pairs. You’d be on the “yen” desk or the “sterling” desk. That makes much sense as there’s only so much information you can absorb.

If I see a client that is successful trading in currencies who then makes a jump to the Indices it often is a sure sign of trouble ahead.

3.      Getting caught up in FX Headlines/Mainstream Media

Many will disagree with me on this one, but following the same headlines as everyone else in forex trading can sometimes lead you astray.

Yes, you need to be informed about what’s going on. You shouldn’t stick in your head in the sand.

Howard Marks said it best when he remarked: “You can’t do the same things others do and expect to outperform”.

If you’re reading Bloomberg headlines saying so and so thinks EURUSD is heading to 1.10, then every man and his dog is reading the same thing. Ask yourself what do you know that isn’t already baked into the price? How can you have the edge over someone else? Is it really by consuming the same news like everyone else?

Being contrarian in life might make people think you’re strange, but in the financial markets, I find it invaluable. The markets are (mostly) efficient, and a lot of what you see is already factored into the price. You need to think differently to the market if you want to get ahead. Remember the GBP after Brexit? Analysts were calling for parity against the USD. You’d be crazy to buy it people said. Fast forward, and it was probably one of the best trades you could’ve made once the negativity died down.

4.      Not using a Demo

This is a pretty standard one, but if you’ve started trading without using a demo first then you’re asking for trouble.  

Do think you can be a pilot after a day of flying lessons? Then when you’re risking your money, you can't be expected to perform well in the markets without doing some practice first.

It takes a lot longer than people think to master their craft at trading and many mistakes on the way.

That being said, you can also spend far too much time on a demo and never understand the psychology of a real trader with real money and emotions on the line. So do practice, but just like when you learn to ride a bike, you will need to take the training wheels off at some point. That’s why we recommend having a demo and a live side by side (and Fusion offers unlimited demos for funded accounts)

5.      Moving Stops and Limits

Ah, the old “Greed and Fear” comment. Lots of people will talk to you about how two things kill a trader/investor, and that’s greed and fear.

Good trading is about good entries and exits.

Traders I’ve seen have spent much time setting up the perfect entry, but then they don’t have an exit plan.

The trades go well for them and then all of a sudden, the greed sets in. Suddenly, their take profit has been bumped up just a little bit higher to capture that extra drop of profit. Then boom! All of a sudden, the trade has reversed, and their profits have disappeared faster than you can say margin call.

Trading without stops and limits is also just as bad. You never know what “black swan” can happen while you’re away from your platform or are asleep. Having protection in the form of stops and limits can help minimise your risk. You can also try to use “trailing stops” which move up as the price moves in your direction. Ask me how if you need a hand with these.

6.      Ignoring the important of Psychology

You might’ve read my other posts about biases and psychology. But my personally believe that life is 80% psychology, 20% strategy and I believe trading is no different.

If you can master your trading psychology, you’ll be a far better trader for it.

This is everything from being too afraid to enter a trade, to being too greedy to close it to learning even more about all the biases we have and how to prevent them.

 7.     Not having a strategy 

Yes, I believe trading is 80% psychology. But you still need the 20% that comes from a strategy.  

What is your strategy? Why would (or should) that give you an edge? How long has the strategy been successful for? Is it technical or fundamental based?

You know the quote – if you to fail to plan, you plan to fail. You can’t show up and hope for the best. You’ll get killed. That’s where testing comes in whether that’s via a backtest of an algorithmic strategy or if it’s just applying the strategy on a demo. Or even just starting small with micro-lots.

You need a strategy if you’re going to succeed.

Sure you might get lucky for a little bit, but it won’t last forever.

Overall, this isn’t a definitive list and unfortunately, following it blindly is no guarantee for success in the markets.

We all make mistakes. I know I do – all the time. But I hope that the above is useful for you as I’ve had a window into watching traders for a long enough time.

Did I miss any? Was there something you thought was even more important? I’d love to hear from you.