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Understand how Forex Correlates
Written by: PaxForex analytics dept - Friday, 27 June 2014 0 comments
A lot of forex traders, especially new traders, do not understand the importance of correlation when it comes to trading. Just take a look at any forex forum and you will often find newbie questions wondering why a currency pair moved while there was no economic report released. It is very important that any forex trader spends enough time understanding basic economics and how currency pairs and events correlate with each other.
Economic news will impact the price of currency pairs and despite the fact that you may only trade based on technical analysis you need to be aware of those reports as the charts will reflect them and therefore at least temporarily influence price action. Skilled technical traders use those events for better entry as well as exit positions into their forex trades.
One example of forex correlation can be found in economic data released out of China. Most forex traders do not trade the Chinese currency or do not have access to it and therefore ignore economic data
out of China which is a big mistake. Inflation and growth data out of China will dictate monetary policy by the PBOC, the Chinese central bank, and could impact growth. Faster or slower growth will impact demand for commodities which China imports and therefore will impact economic growth in countries like Australia, Canada and New Zealand. This means that it will impact currency pairs like the AUDUSD, USDCAD and NZDUSD currency pairs.
Geopolitical events always influence the forex market as traders adjust their positions based on an event. It is therefore crucial to be aware of geopolitical events and understand how they can influence currency pairs which have nothing to do with the area of conflict. Again, the world is interconnected and what happens in one part of the world is often felt around the globe. Make sure you are always aware of any developments around the world and account for them as you analyze your forex trades.
One recent example is the problem in Ukraine. The biggest impact by the coup d’état was felt in the Ukrainian as well as Russian currency, but the effect was also felt in what many traders regard as safe haven currencies such as the Japanese Yen and Swiss Franc. Another currency which felt the impact was the Euro as Russian banks, including the central bank, shifted out of US Dollars and into Euros.