We spent some time yesterday talking about the correlations of various fx currencies to one another. Today, let's look at a present correlation that has an effect on our current trade.
I lump the three Euro currencies together as having an inter-related effect on one another, the Swiss franc, the Euro, and the GB Pound. These generally tend to move in correlations to one another, and certainly against the US dollar.
The euro and sterling have been in a corrective trend against the dollar. They have both now bumped up against the long term down trend resistance line that dates back to the beginning of the year and a little earlier. Both are up against the upper resistance of a channel. However, the Swiss Franc has been taking a beating at the hand of the US dollar. At this point we want to remember the "triangulation" principle. If A is being crushed B, and B is being crushed by C, then A should be obliterated by C. Let's substitute currencies in our little equation to make it clear. If the Euro is being beaten by the Franc, (just look at a eur/chf to see that this is true), and if the Franc is being beaten by the US Dollar (a 12oo pip move in the last month), then the US dollar should be destroying the Euro. If the US mounts it's strength against the single currency as it has against the Franc, the sterling will fall right alongside.
This "triangulation" principal is an important and effective trading tool. it is not infallible, but it has proven itself pretty darn reliable to me.
Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
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