AUD/USD and Neutrality

Continuing with the analysis to exchange rates predict exchange rates using a $5 calculator viewed to AUD, here’s early synopsis.

The currency AUDUSD is the neutral currency pair in the AUD lineup and consistent to neutrality for USD/JPY and closely related neutral to EUR/USD and GBP/USD. I suspect NZD/USD and USDCHF factors to neutrality as well.

AUDGBP at EUR/AUD reciprocal 0.5000’s is not only the bottom currency but it lacks any fit to the AUD complex and fails to serve as a true AUD bottom.

AUDGBP belongs exclusively in the GBP universe as GBP/AUD exchange rate 1.8800’s to allow trading in wide ranges between GBPCAD and GBPNZD.

GBPAUD great currency but strange as a 3 pip built in deviation exists from AUDGBP to GBPAUD. Possibly the reason is a legacy holdover from Australia’s 150 year peg to AUD/GBP from the 1800’s to AUD/USD’s free float in March 1983. The last valid assessment is 3 pips is a factor of the current market price structure and eventually 3 pips will align itself.

AUDUSD as neutral factors to include AUDGBP but subtract AUDGBP then AUDUSD neutrality holds.

The top pair is yet undetermined as work is ongoing. The top depends what role AUDNZD serves in the AUD complex as AUDNZD may serve as an outlier which means AUDCAD becomes the top. What we know from EUR/GBP as to what appears as an outlier exchange rate number is never the case.

What Neutrality means for successful trading by example.

If EUR/USD is in neutral position, this means EUR/USD’s neutrality exists to allow cross pairs to move. Cross pair movements once complete to their deviation from EUR/USD means cross pairs will exist in neutral positions to allow EUR/USD to align to cross pairs.

A back and forth process of deviation exists from EUR/USD to cross pairs then cross pairs to EUR/USD. Its a question of alignment or misalignment as neutrality can only favor EUR/USD or cross pairs but never both. To favor both eliminates trading and markets.

This back and forth works on a quarterly basis and it means 3 months to trade either cross pairs or EUR/USD because it takes 3 months to either deviate from home base or 3 months to re align back home. The same principle in EUR holds for GBP/USD loosely and cross pairs as well as USDJPY, AUDUSD, and suspects NZD/USD and USD/CHF.

From a 2 year view due to hand calculations to trades, the 3 month periods factors as 2nd and 4th quarters favors cross pair trading while 1st and 3rd quarters favors USD V Non USD such as EUR/USD, AUD/USD and USD/JPY. Profit potential depends how far prices deviated from home base.

The 35 posted trades last year all occurred in the 2nd quarter and all trades were cross pairs. At this time, cross pairs were far far deviated and 35 trades literally wasn’t enough to cover all the possible trades.

What neutrality means by EUR/USD example is EUR/USD will trade in small ranges while cross pairs will outpace EUR/USD and even trend. Then the reverse will occur as cross pairs trade dead neutral to allow EUR/USD its ability to realign to cross pairs.
Up next AUD.

 

Brian Twomey