This relationship tends to show as a converse correlation between equities and EUR/AUD. In currency carry trading, the euro is one of the popular funding currencies because of its negative interest rates. The funding currency is the currency that gets exchanged in a carry trade transaction and it is characterized by a relatively lower interest rate.
Whether you’re managing substantial capital or starting small, currency correlation knowledge elevates your trading game. Others are rebellious dancers, deliberately moving in opposite directions. Understanding these relationships helps you predict market movements more accurately. To hedge against the Australian dollar depreciating, you need to have an understanding of other currencies beyond the Australian dollar itself.
About Euro / Australian Dollar
Similar to the relationship between gold and EUR/AUD prices, iron ore futures generally tend to be inversely correlated to EUR/AUD. Perhaps the biggest drawback of trading EUR/CAD is that although the pair provides decent liquidity, the liquidity is still limited compared to that of the majors. The limited liquidity can make EUR/AUD trades susceptible to market turbulence, causing undue risk. Trading multiple highly correlated pairs doesn’t provide true diversification. Most traders focus solely on individual pair analysis, completely ignoring the interconnected web of currency relationships. If you look at the EUR/AUD chart, you will see that this pair has low volatility and therefore is considered a non-technical one.
Additionally, both the Australian and New Zealand dollars offer the highest yields of the major currencies, making them the focus of carry trades. When scalping EUR/AUD, traders usually identify the pair’s general trend and trade this trend. For example, using a moving average to identify a trend, you could buy when the price crosses above the average and sell when the price crosses below the average.
- Most traders focus solely on individual pair analysis, completely ignoring the interconnected web of currency relationships.
- The funding currency is the currency that gets exchanged in a carry trade transaction and it is characterized by a relatively lower interest rate.
- The EU is the world’s second-largest economy and it relies heavily on the region’s service sector, which makes up the majority of GDP.
The Australian dollar is often considered an indicator of growth and risk in global financial markets. As such, it’s often used as a trading device for taking advantage of short-term changes in market risk and global economic growth. The Australian dollar usually exhibits a positive correlation to the general global market short-term sentiment, and the same trend is usually observed in the EUR/AUD pair. That is why you should only invest money that you are prepared — or can afford — to lose at such high risks.
- Over time, the Australian dollar has shown a strong positive correlation to the global equity markets, i.e. the dollar normally strengthens when the equity markets rise, and vice versa.
- However, when measured according to purchasing power parity (PPP), the EU economy is the third-largest after the U.S. and China.
- We’re also a community of traders that support each other on our daily trading journey.
- For example, if the price of iron ore (one of Australia’s major exports) increases, it can lead to a rise in the AUD/USD and NZD/USD.
- However, the AUD/USD does not exist in isolation, and its price movement is affected by a range of economic, political, and social factors.
Swing trading with probability analysis
The Euro (EUR) is the second most-traded currency in the Forex market, and any significant changes in the Eurozone’s economic performance can impact the EUR and the AUD in the same way. In this article, we will discuss the currency pairs that are correlated with the AUD/USD and how traders can use this information to make more informed trading decisions. Understanding the currency pairs that move together gives you a significant edge in the markets. It’s the difference between blindly placing trades and making informed decisions backed by statistical relationships. A correlation coefficient of -1 indicates that two currency pairs will move in the opposite direction 100% of the time. The AUD/USD and USD/JPY are two currency pairs that are negatively correlated.
CONCLUSION: MASTERING CURRENCY CORRELATION FOR TRADING SUCCESS
Moreover, we hereby warn you that trading on the Forex and CFD markets is always a high risk. According to the statistics, 75-89% of customers lose the funds invested and only 11-25% of traders earn a profit. Trading in futures and options carries substantial risk of loss and is not suitable for every investor. Since Australia is a huge gold exporter, the Australian dollar is strongly correlated to gold prices.
FUTURE OF CURRENCY CORRELATION
If the market shifts unfavorably, you could lose money on both trades instead of just one. EUR/AUD has a high degree of predictability and decent market swings that make the pair an attractive choice for many traders. With a good trading strategy, you can leverage the pair’s characteristics to potentially make a good income with minimal risk. Understanding currency pairs that move together transforms your approach to forex trading. Although the correlation between gold prices and the Australian dollar sometimes goes away or totally reverses, the positive correlation tends to exist most of the time. As such, the inverse relationship between EUR/AUD and gold also exists most of the time.
Some currency pairs are perfectly synchronized dancers, moving in harmony. These aren’t random coincidences they’re examples of currency pair correlation, one of forex trading’s most powerful yet overlooked concepts. Use our Currency Correlation tool to find the least or most correlated major currency pairs. Indeed, the curating, sourcing, and organization of this process requires substantial financial investment by Tradersunion.com, which the website earns in the form of advertising payments.
Although you can swing trade EUR/AUD, your average swing trading strategy may not always work well due to the pair’s relatively high volatility. Another big advantage of trading EUR/AUD is the pair’s volatility – EUR/AUD can be quite volatile. While some traders will struggle with this volatility, it can be advantageous to shorter-term traders with a sound strategy for trading volatile markets. Let’s say you go long two currency pairs that move in the same way such as EUR/USD and GBP/USD.
Tradersunion.com does not provide any financial services, including investment or financial advisory services. Also, the Traders Union is not a broker and does not get money for trading in the Forex or CFD markets. Our website only provides information on brokers and the markets and helps its users to select the best brokerage company based on detailed information and objective analysis of brokers. A correlation coefficient of +1 shows that two currency pairs will move in the same direction 100% of the time. The AUD/USD and EUR/USD are two currency pairs that are positively correlated.
From better risk management to Euraud correlation enhanced profit opportunities, correlation analysis provides the edge serious traders need in today’s competitive markets. Currency correlation refers to the relationship between two currency pairs and how they move in relation to each other. Therefore, any significant changes in commodity prices can impact both currencies in the same way. For example, if the price of iron ore (one of Australia’s major exports) increases, it can lead to a rise in the AUD/USD and NZD/USD. Information on the TradersUnion.com website is for informational purposes only and does not constitute any motive or suggestion to visitors to invest money.
