In the dynamic world of forex trading, understanding and effectively utilising currency pair correlations can significantly enhance trading strategies. For intermediate to advanced traders seeking to deepen their understanding and optimise their approach, delving into the nuances of currency pair correlations is essential. This comprehensive guide will explore the intricacies of currency pair correlations, their relevance in forex trading, and advanced techniques for leveraging correlations to enhance trading strategies.
Currency pair correlations are a fundamental aspect of forex trading, providing valuable insights into the relationships between different currency pairs. By analysing these correlations, traders can diversify their portfolios, manage risk more effectively, and identify potential trading opportunities.
Currency pair correlations measure the statistical relationship between two currency pairs, indicating how closely their price movements are associated. These correlations can be positive, negative, or neutral, providing valuable information about the interplay between different currencies in the forex market.
Each currency is driven by its own fundamental factors. For example, both New Zealand and Canada are commodity-driven currencies. New Zealand is driven by a strong export of agricultural and dairy product exports, and Canada is heavily involved in oil production and exports and thus is often positively correlated with the price of crude oil. A trader looking for correlations would be smart to analyse the data and price movements of both types of commodities in order to determine if there will be a correlation between the two currencies.
Understanding currency pair correlations is crucial for forex traders seeking to optimize their trading strategies and maximise profitability. By incorporating correlations into their analysis, traders can gain a deeper understanding of market dynamics and make more informed trading decisions.
Positive Correlations
Positive correlations occur when the price movements of two currency pairs are positively related, meaning they tend to move in the same direction. For example, the EUR/USD and GBP/USD pairs often exhibit positive correlations, as both currencies are positively correlated with the US dollar. Similarly, AUD/USD and NZD/USD are also closely correlated give that both their currency values are directly impacted by the US Dollar and China trade.
Positive correlations can be leveraged by traders to identify trends and capitalise on momentum in the market. By trading currency pairs with positive correlations, traders can amplify their returns and exploit opportunities for profit.
Negative Correlations
Negative correlations occur when the price movements of two currency pairs are inversely related, meaning they tend to move in opposite directions. For instance, the USD/JPY and EUR/USD pairs may display negative correlations, as the US dollar and Japanese yen often move in opposite directions. Another example of a negatively correlated pair is USD/CNY (US Dollar / Chinese Yuan) .
Negative correlations can be utilised by
traders for hedging purposes and risk management. By trading currency pairs
with negative correlations, traders can offset potential losses and diversify
their portfolios to mitigate risk.
Neutral Correlations
Neutral correlations occur when there is no significant relationship between the price movements of two currency pairs. In this case, the correlation coefficient is close to zero, indicating that the price movements of the two currency pairs are independent of each other.
While neutral correlations may not provide immediate trading opportunities, they are still valuable for advanced traders seeking to analyse market trends and anticipate potential shifts in market sentiment.
Numerous factors can influence currency pair correlations, ranging from economic indicators to geopolitical events. Understanding these factors is essential for traders seeking to anticipate market movements and adapt their strategies accordingly.
Economic Indicators
Economic indicators, such as GDP growth, inflation rates, and interest rate decisions, can have a significant impact on currency pair correlations. For example, positive economic data from the US may strengthen the US dollar and lead to positive correlations between USD pairs.
Advanced traders should closely monitor key economic indicators and assess their potential impact on currency pair correlations. By staying informed about economic developments, traders can anticipate market trends and position themselves accordingly.
Geopolitical Events
Geopolitical events, such as elections, geopolitical tensions, and trade disputes, can also influence currency pair correlations. For instance, uncertainty surrounding Brexit negotiations may lead to increased volatility and negative correlations between GBP pairs.
Advanced traders should be vigilant about geopolitical developments and their potential impact on currency pair correlations. By analysing geopolitical risks and their implications for the forex market, traders can make more informed trading decisions and mitigate potential risks.
Market Sentiment
Market sentiment, including investor risk appetite and market volatility, can affect currency pair correlations. During periods of heightened risk aversion, safe-haven currencies like the US dollar and Japanese yen may strengthen, leading to negative correlations with riskier currencies such as the Australian dollar and New Zealand dollar.
Traders should monitor market sentiment indicators and assess their impact on currency pair correlations. By gauging investor sentiment and market dynamics, traders can identify trading opportunities and adjust their strategies accordingly.
Correlation coefficients provide a quantitative measure of the strength and direction of the relationship between two currency pairs. Advanced traders should understand how to interpret correlation coefficients and leverage this information to optimise their trading strategies.
Calculation and Interpretation
Correlation coefficients are calculated using historical price data for the currency pairs under consideration. A correlation coefficient close to +1 or -1 indicates a strong correlation, while a coefficient close to 0 suggests no significant relationship.
Traders should interpret correlation coefficients in the context of their trading strategies and market analysis. By analysing correlation coefficients, traders can identify pairs with strong correlations and capitalise on trading opportunities.
Visualisation with Correlation Matrices
Correlation matrices or charts provide visual representations of correlations between multiple currency pairs. These matrices allow advanced traders to quickly identify correlated and uncorrelated pairs and assess the diversification potential of their portfolios.
Advanced traders should utilise correlation matrices to visualise relationships between currency pairs and identify patterns or trends. By analysing correlation matrices, traders can make more informed decisions about portfolio diversification and risk management.
Traders can incorporate currency pair correlations into their trading strategies to optimise performance and maximise profitability. By leveraging correlations effectively, traders can identify trading opportunities and mitigate potential risks.
Diversification and Hedging
Positive correlations between currency pairs can be utilised for diversification purposes, allowing traders to spread risk across correlated assets. Additionally, negative correlations can be used for hedging purposes, where positions in one currency pair are offset by positions in a negatively correlated pair to mitigate risk.
Advanced traders should assess the correlations between currency pairs and adjust their portfolios accordingly. By diversifying their holdings and hedging against adverse movements, traders can protect their capital and optimise their risk-return profile.
Correlation-Based Trading Strategies
Correlation-based trading strategies involve identifying and trading currency pairs with strong correlations. Pair trading strategies involve simultaneously buying one currency pair while selling another negatively correlated pair. Portfolio optimisation strategies aim to create diversified portfolios with uncorrelated assets to minimise risk and maximise returns.
Traders should develop robust trading strategies based on their analysis of currency pair correlations. By incorporating correlation-based strategies into their trading plans, traders can enhance their performance and achieve their financial goals.
Traders can use correlations to identify trading opportunities based on the strength and direction of correlations between currency pairs. For example, if two positively correlated pairs temporarily diverge in price, traders may consider trading the pair that lags behind in anticipation of convergence.
Advanced traders should conduct thorough analysis of currency pair correlations and market trends to identify trading opportunities. By staying informed about market developments and leveraging correlations effectively, traders can capitalise on profitable trading opportunities.
Risk Management Techniques
While currency pair correlations can be beneficial for enhancing trading strategies, traders should implement proper risk management techniques to mitigate potential losses.
Position Sizing
Adjusting position sizes based on the correlation between currency pairs can help traders manage risk effectively. Traders may choose to reduce position sizes or avoid trading highly correlated pairs to minimise exposure to correlated market movements.
Advanced traders should carefully consider their risk tolerance and adjust their position sizes accordingly. By implementing appropriate position sizing techniques, traders can protect their capital and preserve their profitability.
Stop-Loss Orders
Using stop-loss orders can help limit losses and protect trading capital in the event of adverse price movements. Traders should place stop-loss orders based on the volatility and correlation of currency pairs to ensure adequate risk protection.
Advanced traders should set stop-loss orders based on their analysis of currency pair correlations and market conditions. By using stop-loss orders effectively, traders can minimise potential losses and preserve their trading capital.
Currency pair correlations can fluctuate over time and in response to evolving market conditions. Advanced traders must consistently track correlation coefficients and modify their trading strategies to align with shifting market dynamics. By remaining attentive to changes in currency pair correlations and adeptly adjusting their trading approaches, traders can optimise their performance and effectively pursue their trading objectives.
To illustrate the application of currency pair correlations in forex trading, let's consider some practical examples and case studies.
Example 1: Diversification
A trader with a long position in EUR/USD may consider diversifying their portfolio by adding a short position in GBP/USD, which has a positive correlation with EUR/USD. This allows the trader to spread risk across multiple currency pairs and reduce exposure to adverse movements in the euro-dollar exchange rate.
Example 2: Hedging
During periods of heightened market volatility, a trader holding a long position in AUD/USD may hedge their exposure by taking a short position in USD/JPY, which has a negative correlation with AUD/USD. This helps mitigate potential losses resulting from adverse movements in the Australian dollar-US dollar exchange rate.
Case Study: Correlation-Based Trading
A trader identifies a strong positive correlation between USD/CAD and crude oil prices due to Canada's significant oil exports. The trader takes a long position in USD/CAD and a short position in crude oil futures, anticipating that an increase in oil prices will lead to a corresponding appreciation of the Canadian dollar against the US dollar. This correlation-based trading strategy allows the trader to profit from the relationship between the two assets.
Currency pair correlations are a powerful tool for intermediate to advanced forex traders seeking to optimise their trading strategies and maximise profitability. By understanding the different types of correlations, analysing the factors influencing correlations, and leveraging correlation coefficients effectively, traders can enhance their performance and achieve their financial goals. Implementing proper risk management techniques is essential to mitigate potential losses and ensure long-term success in forex trading. By incorporating currency pair correlations into their trading plans and adapting to changing market conditions, traders can navigate the complexities of the forex market and achieve consistent profitability.
Foreign exchange (FOREX) goes through ups and downs. Some events had stripped bare the possible volatility of the market, causing fear in the hearts of investors. Here are some top events since the year 2000 that caused chaos in the markets.
The Forex Probe of 2013 was a scandal that revealed how international banks had been working together for at least a decade to tweak Forex market exchange rates.
Again, this event was all about investor fears of market manipulation as a result of bank collusion. It wasn’t easy to trust the market again after such practices were revealed.
Four major banks admitted involvement, but the 2013 Forex Probe remains one of the most impactful foreign exchange events since 2000, even though the banks paid up $6 billion in fines.
In 2013, the Greek economy revealed its fragility, although it already showed some cracks during the 2007 worldwide financial crisis.
It looked like Greece was going into an irreparable downfall. Still, the European Union overextended itself by granting it a generous loan of £68 billion. While the EU might have saved Greece, this move would remain one of the top events in Forex history for such a large amount of money changing hands.
The consequences of the crisis could still be felt as Greece’s debt problems reverberated in 2015. Because Greece couldn’t reach its deal, some currencies surged, such as the Japanese Yen and Swiss Franc found which found themselves on the rise.
However, other currencies didn’t fare so well in 2015. The Euro plunged in the Asian trading session. The dollar also experienced a one-month low of 122.10 yen.
Political uncertainty in one country can affect many other countries, and sometimes the impact lasts for years. That is why the Greek Debt Crisis of 2013 makes it to our list of the most significant Forex events in the new millennium.
Since we have already looked at what a flash crash is about, we can go straight to how the Sterling Pound lost its value within seconds on the 7th of October 2016.
A fat finger error was suspected, but the Bank for International Settlements ruled that there was no proof it was the case. Further investigations revealed that algorithmic trading programs had triggered the crash. The algorithm issue was paired with traders who didn’t want to take much risk.
Brexit 2016 caused panic in the European Union, especially when its economic effects were felt. Of course, it also had an impact on the foreign exchange market.
The story of Britain’s breakup with the European Union was one of the top events in politics and Forex history. It went to show just how intricately related these aspects were.
The UK’s unexpected move was what created the panic. Understandably, something so unprecedented had to affect the market. Right before the votes were out, the British pound sterling was moving in an upswing trend. However, it ended in a closing of 8% down for the GBP/USD pair on that day.
A slide preceded the Brexit-caused slump for about a year.
You may believe that Apple is mainly influential in the technology market. Think again. Its reaches have some effects on the foreign exchange market, as well.
Apple’s statement in January 2019 that emphasised the Chinese economy’s struggle had several investors selling their most volatile currencies.
When investors lose confidence in the Chinese economy, their trust in the AUD and JPY also fluctuates. After all, Australia is its most important trading partner.
Therefore, a simple statement from Apple in 2019 has caused one of the most significant foreign exchange crashes of recent years.
In the same year, in February, the Swiss franc also suffered a crash. However, some considered this an inconsequential event.
The Swiss Franc experienced a significant drop during the Asian trading session on the 10th of February. It dropped against the US dollar and other major peers.
When the Japanese markets closed for National Foundation Day, the Swiss francs suffered from a lack of liquidity.
Another critical Swiss franc crash happened a few years prior to this, in January 2015. The flash rally, as some call it, occurred after the Swiss National Bank announced that its currency would no longer be pegged at 1.20 against the Euro. Because of this, the franc went up by 20% against not only the Euro but also some major currencies.
The Black Swan event certainly caused a stir in the financial markets. Moreover, it points to the fall of the most popular of cryptocurrencies - Bitcoin.
So, when the cryptocurrency fell to almost 4970 USD per coin, it caused sheer panic among investors. That was an 80% loss in value. For comparison, its 2017 value was at 19716 USD.
Bitcoin was not alone in creating fear among investors, as Ethereum also dipped from 285 USD to 110 USD. COVID-19 was believed to be the cause of the plunge.
Because the cryptocurrency crisis of 2022 was considered a Black Swan event, it affected other financial markets, including foreign exchange.
The fear generated by black swans is especially fearsome due to their ability to wipe out entire accounts. Reliance on standard forecasting tools can fail to predict potential damages, and that is what makes black swan events so rare and devastating.
The COVID-19 pandemic continues to make its effects known in various industries worldwide. During that crisis economic growth expectations were downgraded in fear that major economic sectors had to be shut down due to the increasing coronavirus cases. That uncertainty reduced the demand for local currencies and investment funds. In addition, it impacted exchange rates and the fluctuating value of the US dollar as a world reserve currency.
As a result, economic and political measures created significant changes worldwide and left a mark in Forex history.
While there may be more FOREX-related events in the past and the upcoming future that will affect the market, the above are the ones that still have tangible impacts in the past few years. It is crucial for forex traders to stay ahead of an ever-changing market, and one of the ways to achieve it is to understand its history.
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The forex symbol USD/BRL indicates the exchange rate value between the USD (US dollar) and the BRL (Brazilian Real)
Currency background
The USD dollar is the United States of America’s official currency. Each dollar is made up of 100 cents. It is represented by US$ when differentiating it from other countries’ dollar currencies. However, they are more often just marked as $.
This currency has become the benchmark for other currencies because it is the most popularly used one. Even territories beyond the US have commonly used it as an unofficial currency.
Because it is often at the core of foreign-exchange trades, it has its own index – the USDX. It is regarded as the world’s most stable currency.
The Brazilian Real (BRL) is Brazil’s official currency. Each Brazilian real is made up of 100 centavos. It is represented by the R$ symbol.
It was first used as the country’s official currency in July 1994. It replaced the cruzeiro real. The exchange ratio between the former and the current currencies are not 1:1, either. 1 real is equals to 2,750 cruzeiro real.
From 1994 to 1999, BRL was pegged to the USD as an attempt to maintain stability. As the largest Latin American economy, it is worth looking into. It is also the 9th largest in the world.
If you’re considering taking the USD/BRL pair, here are the things to consider:
Currency values depend on the economic conditions and public reception of their country’s stability.
Since the mid-twentieth century, the USD dollar has established itself as a powerhouse in the global economy. However, because it is a fiat currency, it is also affected by the United States’ economic outlook and activity.
Its strength may be good for the country itself. It can also be good for those who may be relying on its general strength to earn in foreign exchanges.
However, a powerful USD can be detrimental to countries relying on exports from the United States.
While the USD is obviously strong throughout, much can be said about Brazil’s economy as well. It is believed to be one of the strongest emerging economies due to its rich natural resources.
Its diversity in economy has spurred foreign investment to pour in. With an estimated $200 billion of direct investments, Brazil’s currency is doing great.
It wasn’t always the case. The currency faced several currency crises such as the Mexican currency one from 1994 to 1995, and the one with Asia and Russia in 1997 and 1999. Investors then didn’t want to have anything to do with the Brazilian real.
When the US exports more products, it triggers more demand for its currency because customers must change their money to dollars to be able to pay for the goods.
The US government and top American corporations may also issue bonds that can be purchased only with the US Dollar. Foreign investors must buy dollars to buy those financial instruments.
Because of the overall reliability and strength of the US dollar, a lot of investors will still buy the currency as a reserve.
Currencies depend on perception or market sentiment. For example, if people have been watching the news, finding out about a weakened US economy or increased unemployment, the tendency is to buy back their local currency. This will lower the value of the dollar.
The same goes with the BRL, but even worse since it is a less popular currency. While its economy is doing well and has it placed up there among emerging markets, political corruption could be its downfall.
One of the factors that affect perception is geopolitical conditions. How are the politics in the country?
USD is a dominant global reserve. It may experience some lows, but it is always generally high in value. Recent events have this fiat currency on the rise, too. On the other hand, Brazil also started strong this year and has been pulling from Russian assets.
What can provide some volatility in the USD/BRL pair is Lula’s recent election as the President of Brazil.
Now that you know the strength of the individual currencies, how do you trade the USD/BRL pair?
While USD is a stable currency, Brazilian real is the currency of an emerging market. It means that Brazil’s GDP has been steadily growing from 2000. A similar trend is expected to continue.
You will earn a profit because an emerging market’s GDP tends to grow rapidly. However, you must be vigilant because it is also at risk of being negatively impacted by political instability and currency fluctuations. Weigh risks against rewards.
Trade when the USD/BRL is at its busiest, and potentially at its most volatile. The 8:00 to 12:00 Eastern Time frame is also the time when USD details are more readily available.
It is when significant chunks of data have been released that a currency pair’s volatility increases. Be watchful at this time because you will have increased opportunities for profitable trades.
USD/BRL is useful if you want to diversify your foreign exchange
portfolio. Your portfolio may see increased gains/losses when one of the fiat currencies in your portfolio is an
emerging one.
Emerging currencies are more likely to display greater volatility. They have also been steadily rising since 2000. Though the previous formation is not a guarantee of future performance, the current strength of currencies like the Brazilian Real is reassuring.
Of course, you will be dealing with two currencies that can give you a lot of value. The USD is always strong. Meanwhile, BRL performs well because of the resources and commodities that Brazil can export. Exports can strengthen both currencies because they prompt investors to buy them.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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).
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) 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.
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.
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.
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.
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.
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.
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.
The forex symbol GBP/USD indicates how much the British Pound (abbreviated as GBP) is worth in relation to the US Dollar (abbreviated as USD). This article provides traders information on how much USD is needed to buy one GBP. Forex traders call an exchange of this pair as “trading the cable,” a nod to how New York and London used to transmit trading information.
The GBP/USD pair is among the oldest currency pairs traded in the world. It is also among the most popular pairs to trade and is considered a major forex pair.
If you’re considering trading
this pair, read on for a quick dive into the history of these currencies, their
dynamics, and how you can trade this pair.
If you want to read more articles about our pairs, check out our posts on: USD/JPY and EUR/CHF.
GBP is the official currency of the United Kingdom and its territories. Its history can be traced back to continental Europe. With over 1,000 years of history, it is one of the oldest, if not the oldest, currency still in use. In 1694, the Bank of England was established, and banknotes entered circulation shortly after.
The GBP’s importance goes beyond the UK and its territories. It used to be the dominant international currency before USD took over in the 20th century. However, it is still among the most widely used currencies for financial transactions worldwide, along with the USD and the Euro (EUR). Further, as of 2021, the GBP comprised 5% of official foreign reserves (i.e., share of currency reserves held by central banks).
USD is the official currency of the United States, dating back to the 18th century. In 1785, the US adopted the dollar sign, which is now, perhaps, the most recognizable currency symbol in the world.
The USD plays a major role in the global economy, dominating international finance. It is the most active currency for international payments. It has also been the top international reserve currency since World War II, with an over 50% share of global reserves. In forex markets, almost 90% of all transactions involve USD.
No background of these two currencies would be complete without mentioning the historic Plaza Accord.
In 1985, the US, UK, France, Germany, and Japan—then known as the G-5—agreed to jointly intervene in the currency markets to correct trade imbalances. The devaluation of USD was meant to reduce the increasing US trade deficits.
In a couple of years that followed the agreement, the USD declined in value by about 50%, while GBP and the other currencies appreciated by about 50%.
The GBP/USD pair is among the most liquid in the forex market, with smooth price movements as there’s enough volume of trade in the market.
Various factors move the prices of currency pairs in the forex market. For most currency pairs, prices are affected by economic trends and geopolitical circumstances, both locally and globally.
Here are some factors that drive the GBP/USD dynamics:
Both the US and the UK are among the largest economies in the world.
Due to its size and role in the global economy, the economic situation and policies in the US affect many economies and markets worldwide. In general, the GBP/USD rises when the UK economy grows more than US economy.
If you’re trading US-based pairs, you can keep up to date with US economy updates through government data releases and economic reports or Fusion's economic calendar, which includes data such as GDP growth, interest rate decisions and balance of trade.
The US is one of the three largest players in global trade, along with the European Union and China. The US is among UK’s major trading partners, accounting for about 10% of UK imports and receiving over 15% of UK goods exports.
The trade balance situation generates some volatility for GBP/USD. GBP/USD rises when current account balance (i.e., the balance of trade between the two countries) increases for the UK.
The Federal Reserve (Fed) sets the monetary policy in the US, a key determinant of currency strength, with the aim of stabilizing US prices and maximizing employment. In the UK, the Bank of England (BoE) sets the interest rate to maintain low and stable inflation. It reviews rates every 6 weeks.
A rule of thumb here is that the pair rises when the BoE interest rates rise more than the Fed rates.
As the USD plays an important role in international markets, movements in interest rates set by the Fed have a critical impact on the movement of many currencies worldwide, including GBP. In 2022, steep rate increases have strengthened the US dollar, causing other currencies to dive as investors rush to USD.
Like other currency pairs, the GBP/USD is also driven by political uncertainties and global risks.
The GBP took a hit following the global recession in the late 2000s. In 2016, after the announcement of Brexit, the GBP dived to its lowest against the USD, as UK’s decision created uncertainties to how its trade prospects would pan out.
GBP/USD and GBP/EUR - 2014-2021
As
USD is a global reserve currency, it serves as a haven at times of global
uncertainties. During the height of the COVID-19 pandemic in 2020, the GBP/USD
rate dropped by 12% as investors sold the GBP and rushed to the safer USD.
GBP/USD and GBP/EUR - 2007-2010
Is the GBP/USD pair worth going into?
The US and the UK are among the largest economies in the world, with both USD and GBP playing important roles in international finance. The two countries share strong economic relations.
In forex markets, almost 90% of all transactions involve the USD. Post-1980, the pair has been less volatile, with extreme movements stemming from major global and regional events such as the Brexit and the COVID-19 global situation. The pair is one of the most liquid in the market.
If you’re new to the forex market, trading with highly liquid currencies such as GBP/USD could benefit you. This is because many strategists recommend trading in these currency pairs while you’re still improving your grasp of forex trading. You're also in luck, in that, Fusion Markets is the lowest cost regulated broker on the market. Start trading today!
