Trading USD/CHF EUR/USD Relationship

[t-bone]

Hi all,

A bit of a newbie question but the relationship between these two pairs are very similar.
Firstly i was wondering why this is? Why is the relationship so correlated (all be it negatively correlated)? Is this just a natural product of the way forex works and these two will always follow each other, or, are they currently trading so closely to each other because this is a current market trend and in the past/future there is no reason for this close relationship?

My reason for asking is could one trade the spread between these pairs? Their correlation is "almost" (i think about 98%) perfect so could this allow us a 2% profit opportunity? i.e if USD/CHF makes a short fast move that the before the euro could you profit from this move expecting the ( i assume natural) realigning of the pairs?

Thanks
Tom

 

[Anonymous]

I think it is more appropriate to think of the 3-way relationship rather than the correlation of the 2.

 

[t-bone]

maybe a dumb question how would you go about trading the 3 currencies in relation to them falling out of synch with each other?

 

[ivor31]

t.bone
I trade the eur as i get a 2 pip spread which lets me get it wrong at less cost. i use the usd/chf as apposite coloration and often an insight as to how strong/weak the dollar is vs eur.To try to steal the spread would be really hard work(especially for me).You could always trade both in the same direction with greater margin placed on your desired direction and desired pair then exit the hedging trade once direction is confirmed. Im playing with this idea at the moment. Will post you my outcome at some time. Remember that us traders are wrong 90% of the time,as some people like to reiterate frequently,so trade against yourself and save the winning trade

 

[badtrader]

t.bone
Remember that us traders are wrong 90% of the time,as some people like to reiterate frequently,so trade against yourself and save the winning trade

And I highlighted it to you ivor did I not

 

[Anonymous]

how would you go about trading the 3 currencies

It's in the area of 3-way arbitrage:

If A/B, C/A
then A/B x C/A = C/B

There has to be an actual transfer from, say, one account to another. For contracts in the manner like rolling spot and CFD, by which once you open a position you have to close it, I don't think it is possible.

If relying on correlation, it is much better to think in terms of A/B spot and A/B futures.

 

[mburdge]

Hi t-bone,

You can get accurate correlation figures for this and other pairs over different time periods at www.mataf.net

 

[ivor31]

badtrader
I knew you would spot that remark, your like a shark to blood. Respect to you on your psychology to win from others losses,but i do believe others have beaten this psychology over the past weeks,or are certainly on par. I enjoy the challenge to trade as do others but of last i dont have much time to do so, hence no posts. I will catch up at sometime. I'm keeping my day job for now.

 

[badtrader]

badtrader
I knew you would spot that remark, your like a shark to blood. Respect to you on your psychology to win from others losses,but i do believe others have beaten this psychology over the past weeks,or are certainly on par. I enjoy the challenge to trade as do others but of last i dont have much time to do so, hence no posts. I will catch up at sometime. I'm keeping my day job for now.

Nice to here form you. The problem with the cable thread most have stopped trading live, what they tend to say, I made 50 pips or so today, but not live trades, so I take these with a pinch of salt. at least you ivor give live calls.

 

[ivor31]

badtrader
The thing is we all try really hard to make trading our dream.To have no boss,to be self sufficient for the rest of our lives,and to laugh at all those doing a 9 to 5. Thats my goal anyway. Its hard to accept criticism. Especially live. Its a bold act to post your trades for everyone to rip to bits or as you do trade against. It gets a bit heated as you know. You should post why you would not trade in the direction and explain why. We are all small traders amongst the mass.

 

[forexaut]

Hi all,

A bit of a newbie question but the relationship between these two pairs are very similar.
Firstly i was wondering why this is? Why is the relationship so correlated (all be it negatively correlated)?

EUR/CHF has very little volatility; this must be because Switzerland is in the middle of Europe and must be well integrated economically. Buying EUR/USD and buying USD/CHF is the same as buying EUR/CHF. Even though both pairs fluctuate, their fluctuations have to cancel because EUR/CHF is stable. That means they move in opposite directions.

My reason for asking is could one trade the spread between these pairs? Their correlation is "almost" (i think about 98%) perfect so could this allow us a 2% profit opportunity? i.e if USD/CHF makes a short fast move that the before the euro could you profit from this move expecting the ( i assume natural)

That would be a carry trade idea -- pocket the interest rate differential; the question is whether you can insulate the principal from the risk.
If you look at EUR/CHF autocorrelation you will see that it is just
like AUD/JPY and many other carry-trade pairs. It has negative spikes surrounding the positive peak at zero time lag. This means it is very difficult to stay in this trade -- the market reverses its course as if to shake off the carry-traders on purpose. I believe this is just like any other carry trade, but details of course can vary with time.

 

[jeffsmith]

Dollar against euro and yen- has falen as U.S. stock futures have dropped.U.S. has entered a recession that will pcontinue into next year."After growing 1.4 percent this year, the U.S. will contract 0.2 percent in 2009"Economists are generally pessimistic about the economy.