Inside the Currency Market: Currency Pair Design and Construction
Posted by Brian Twomey on January 29, 2015 at 12:37pmView Blog
Few quick thoughts for interested.
No 2 currency pairs are the same, that concept doesn’t exist. Even AUD and NZD are vastly different. Each pair is tremendously different in construction, design, and purpose. Each currency pair has a vastly different driver to price movements, each pair has a vastly different price location within itself and among its peers. Each pair shares a far different place among and in between yield curves.
Some pairs are correctly positioned,some not. Some pairs are deeply out of whack, others not far off. But price divergences exist. What makes currency pairs different is a reflection of their market and economic system but combined, its what makes markets.
For example, NZD offers a smooth yield curve, AUD does not. NZD offers a clear and concise pattern in their interest rates, AUD does not. But regardless, each has a vastly different system and each currency pair is driven by deeply divergent factors.
One example EUR/GBP.
EUR/GBP has about a 30% price divergence between EUR/USD and GBP/USD. 30% however is ever changing but slowly. But 30% is not much and its why EUR/GBP is a slow mover. Its was designed to be a slow mover. Its price remains contained between EUR/USD and GBP/USD purposefully in construction and design. If EUR/USD or GBP/USD crashed then the BOE and ECB has EUR/GBP to rely upon to conduct nation’s business. EUR/GBP trades, its location, its position is between the 2 year and 3 month in the yield curve. Over time that location may change.
Currency pairs the world over come in two forms. Interest rate and yield currencies. Its why many math models and indicators are failures. They don’t catch the concepts. RSI is popular but it is completely worthless against a currency pair. We beat the testing to death, it fails. It averages highs Vs lows to form a line. I was fortunate to have a few conversations with Welles Wilder. My belief from conversations is RSI was designed for strictly Commodities not currencies. But RSI as today’s indicator is not totally the exact Welles Wilder feature. Its actually off and won’t catch currency pair movements correctly.
Few thoughts on Realignment.
Realignment. When currency prices align, realignment is done. So will our volatility be done. How long? Must be viewed in yearly periods. From my Index consisting of EUR, AUD, GBP, NZD, years 2009 – 2010 saw good volatility numbers. 2012 – 2013 saw good volatility numbers. 2011 – 2012 was dead. 2013 – 2014 saw nearly a 1% increase in volatility and all measured by each pair Vs each other. 2008 was the base period indexed so hard to measure by itself but that was also the new period year. The higher the volatility, the faster markets align to prices then we go to flat again. I’m highly interested in this realignment issue because its like halley’s comet. Its not seen very often and I may not see it again in my lifetime. So its followed closely.
Always many sincere thank you’s to all the many good and decent people, friends, followers, readers and those that trade with me.
Brian Twomey, Inside the Currency Market, btwomey.com