USD Correlation & Crosses

[c6ackp]

Hi

I've recently taken an interest in the FX crosses as I wanted to find currency pairs, which are not strongly correlated with USD, that I could trade alongside cable.

It would seem that, most of the time, if I were to trade [GBP/USD and CHF/USD] or [GBP/USD and USD/JPY] then I'd be jumping in and out at rougly the same time as the majority of moves appear to be due to dollar sentiment. I'd have 1 lot short and the other long, so I may as well have 2 lots on cable (?).

EUR/AUD is an interesting pair but the spread is a bit heavy (15 pips on FXCM) for intraday.

I suppose EUR/GBP would make sense, but the pip movements are small in comparison with cable. EUR/CHF tends to be a bit noisy.

Anyone have any ideas on what I could trade alongside cable? Is it worth it? Perhaps it's best to just focus on the majors (whichever breaks first)?

Does one currency tend to trigger moves in other majors/crosses? Do the crosses respond immediately?

What do other fx traders do: concentrate on 1/all the majors & maybe a little dow action alongside fx?

Are there any "rules of thumb" as to when there might be significant cross rate action (instead of noisy switching)?

Also, anyone know what caused the 1100 pip drop in GBP/JPY between 16/8 and 7/9?

Anyone have any pearls of wisdom on the interplay between majors and crosses?

Thanks in advance,
Steve

 

[a_gnome]

Hi there

You are of course right that if you are trading FX rates with USD in then a lot of the time you will be making the same trades in each market. I do find it useful to watch the relative progress of the different rates: if one rates is out/under-performing the others then you can get extra benefit in using that one against the dollar.

As far as cross rates are concerned I personally like the EURJPY cross. Especially at the moment where there is so much uncertainty in the dollar, to trade something without the USD in can be very helpful. This is also a major currency pair and you should get ~3pip spread and a lot of people are trading it.

Hope this helps

 

[c6ackp]

a_gnome

thanks for the reply

How long you have been trading this cross? Have you identified any patterns relating to when you switch to trading the EUR/JPY cross?

The out/under-perform idea is interesting: I wonder if there are any cross currency indicators which will monitor this type of (possible) disparity automatically?

Steve

 

[forexaut]

Hi

I've recently taken an interest in the FX crosses as I wanted to find currency pairs, which are not strongly correlated with USD, that I could trade alongside cable.

<...>
Does one currency tend to trigger moves in other majors/crosses? Do the crosses respond immediately?

<...>
Are there any "rules of thumb" as to when there might be significant cross rate action (instead of noisy switching)?

Hi,

I came up with the same questions and have been working on this for some time now. One approach would be to monitor a cross-correlation of the two exchange rates as a function of the time lag. One needs to define what is meant by "immediate" response. I define "immediate" to be within the same trading hour -- you will see that in some cases there are responses which last longer. To see if there are triggers, one needs to analyze larger time lags. I've accumulated a number of observations like that on my forex trading system development site. The rule of thumb that seems to emerge is: the larger the interest rate differential, the more likely it is that a given cross-rate will serve as a trigger for another one with a smaller interest rate differential.

Speaking specifically about GBP/USD, I've seen that GBP/USD tends to lag begind AUD/JPY (which fits into what I said above). One the same topic, sometimes GBP/USD leads and CHF/EUR follows (EUR/CHF moves the opposite way). Both are weakly correlated
in the "instanteneous" sense but significantly correlated in the delayed "trigger" sense. Of course the situation changes in time, don't drive today with yesterday's map.