Why such strong correlation of pairs?
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thread: Why such strong correlation of pairs?

  1. #1

    Why such strong correlation of pairs?

    This isn't as simple a matter as it initially seems. I am struggling to understand currencies behave almost identically on their pair crosses at exactly the same time.

    By way of instance, when the EUR is weakening, it is going to fall simultaneously against the USD, CHF, JPY, GBP etc.. On the face of it this seems clear, but I can not know why or the mechanics.

    As we all know, the sale of one currency is just done from the buying of another. It is a true market of one and trading currencies electronically is not any different to doing it physically at the regional bank or Bureau de change. If I determine the EUR is becoming less valuable, I'd like to sell it and swap it for something of greater worth (preferably of the greatest value). If I had been to do this in my regional bank, I wouldn't walk in with my Euro's and ask to swap for GBP, also USD, and CHF, and JPY etc, not least because any one of those other currencies might be of even less worth than my Euro's.

    So does the EUR strengthen or weaken simultaneously against all of the other currencies? This is very evident when watching term time frames. When there's a sudden 20-30 pip move involving the EUR over a two minute period, the move is going to show up on each pair which includes the EUR. Why? How can that happen?

    Is somebody actually buying or selling the exact same currency in exchange for every other currency they can get their hands on? If so what would be the logic for this activity? Or is it a case of the main liquidity providers concurrently removing their BID's or even OFFER's in the market for some reason? (contrary to popular belief, prices can move on your chart with no buying or selling taking place).

    I will understand the significance over the long run as governed by economic sentiment, but I can not know it in the supposed noise at the shorter term. Spikes and the fluctuations will happen almost identically on every single pair involving the currency, and I cant figure out why this would happen. Why would sound happen at precisely the exact same time on each pair? That 10 spike upward and then immediately back down again happens on each EUR pair - which isn't random; it has to be coordinated in some shape or another.

    Any help from somebody with more in-depth market knowledge than me would be greatly valued.

  2. #2
    Junior Member Oxster10's Avatar
    7
    I'm uncertain what you are asking, however, if your asking why if the EUR fluctuates. . It moves it's other cross pairs. . This is only because each currency has a Trade weighted Index. If you are interested you should google TWI or trade weighted index

  3. #3
    I am not sure what you're really asking, but if your asking why if the EUR fluctuates. . It moves it cross pairs. . This is because each currency has a Trade weighted Index. If you're interested you need to google TWI or trade weighted index
    I think that is precisely what I've been on the lookout for, thank you.

    I am amazed at my own naivety and lack of understanding occasionally. I am trading for a living in a market I certainly do not know at the most superficial level.

    So am I right in concluding that if there's heavy selling of EUR in exchange for USD (real trades and exchange of currencies just one for the other), the price reflected on a chart of this EURJPY will similarly change due to this automatic re-adjustment of this weighted index for the Yen's connection with the EUR, and this change in price is based on an alteration in the BID's and OFFER's from the market, rather than any substantial quantity of actual buying and selling of Euro or Yen? Effectively the banks are automatically altering their exchange rate of EURJPY to reflect the change from the EURUSD connection, and they do so irrespective of demand and the supply for the EURJPY in the time?

  4. #4
    Junior Member Oxster10's Avatar
    7
    Ok ok this is the way it works. . When you move long in EUR/JPY for instance. . You arent buying EUR into the pound or a currency'EUR/JPY you are buying EUR. . When you brief. . You're simply buying JPY hence there is a correlation. So pairs such as aud/usd. . If you sell and go. . It means you purchased aud and market. . Exchanging it for usd. If you notice on your account there'll be a pip price. E.g. when utilizing 10,000 the current pip price is 0.98 for aud/usd (utilizing AUD as base currency)

    sorry if I didnt explain it obviously

  5. #5
    Junior Member Oxster10's Avatar
    7
    I supposed euro into the yen

  6. #6
    Junior Member agomwz.69's Avatar
    4
    This is not as simple a question as it initially appears. I am struggling to understand individual currencies act almost identically on all their pair crosses at precisely the exact same time.

    By way of instance, when the EUR is weakening, it is going to fall simultaneously against the USD, CHF, JPY, GBP etc.. On the face of it this seems obvious, but I just can not understand the mechanisms or why behind it.

    As all of us know, the selling of one currency is just done by the buying of another. It is a true market of one for...
    Broad significance like this is more an indiion of the selling off/buying of the Euro specifically. These tend to be good times to exchange.

  7. #7
    I believe I might be coming across a little naive if I don't have any grasp of the fundamentals. I really think my question is a little deep that will appear at first glance.

    I realise that when I buy EURJPY, I am not having any direct relationship or discussion with GBP or some other currency directly. I am buying EUR and selling JPY to do so. The buying and selling of one currency against another is straight forward.

    What I'm trying to understand is why (or more importantly the way ) selling/buying on a single pair would impact another pair.

    If I was a major participant and that I sold 1 Billion Euro in exchange for Yen causing a quick fall in the EURJPY price as I consume the accessible BID's in the market, why could the EURUSD price also instantly drop significantly when I did not touch this pair? Does this make sense concerning my question?

    There is no major selling of EUR against the USD, and yet the EURUSD pair will certainly drop in unison with the EURJPY. This is the correlation I am attempting to understand. Prices are moving with no buying or selling taking place. I guessed that this was the case, but did not understand why, along with this thread's purpose was to learn more for setting exchange rates across the board, and each individual currency impacts others.

    According to studying about the Trade Weighted Index, I Believe I am Beginning to understand it now. When there's a shift in the exchange rate of one currency pair (one economy against the other ), the liquidity providers automatically factor that in to their BID's and OFFER's on other pairs which are assessed on this weighted calculation. Since the value adjusts to perform the BID's and OFFER's the banks set out in to the market for other pairs, and the available price on the EURUSD and other EUR pairs will adjust in unison with the EURJPY. Therefore, even though the heavy selling only took place on a single pair (actual buying/selling transactions moved the market in EURJPY), the other pairs also moved based only on the alteration of BID's and OFFER's at the market, with no significant transactions taking place.

    This intertwined relationship measured with the weighted index explains so much that I was in the dark around previously.

  8. #8
    Junior Member Oxster10's Avatar
    7
    Why another would influence. Since if you buy the EUR agaisnt the pound you are in fact buying the EUR currency itself and ONLY the meaning. . Demand for the EUR no matter that cross pair the price will go up therefor there'll be an upwards movement in another EUR crosspairs

  9. #9
    why it might affect another. Since in the event that you buy the EUR agaisnt the pound you are buying the EUR currency itself and ONLY that the meaning. . More requirement for the EUR regardless of which cross pair the price will go up therefor there'll be an upwards movement in the other EUR crosspairs
    that I might be about to come unstuck here and have to go back to the drawing board for everything that I ever thought I knew about trading currencies....but I believe you're 100% wrong here.

    If I buy the EUR against the GBP, I am not just buying the EUR, I am simultaneously selling GBP. I am promoting GBP in order to cover the EUR I want to buy. This is the purpose of having currency pairs: I am exchanging one. If I was just buying EUR as a entity, there would be no need for pairs, we'd just trade a index. Let's not forget that the Forex market was created primarily to do with speculators, and nothing to facilitate trade.

    If I walk in to my regional Bank department and ask to buy EUR, they will expect me to cover it using some thing, and whatever I am paying for it with, is that the currency I am selling.

    When I am buying the EURGBP it is a straight transaction between these two currencies, and on this basis shouldn't impact any pairs....but it clearly does, and this is what I've been trying to determine which I think I've thanks to you pointing me in the direction of the Trade Weighted Index.

    I'm not questioning why there's a relationship between currencies and correlation between different pairs. I am asking how this occurs. What's its mechanics? , and that I believe the Trade Weighted Index answers that question for me personally.

    When one pair undergoes heavy buying or purchasing, the other pairs will even experience and change in price, although no buying or sale occurred right between these other pairs. I knew that happened but didn't know exactly how or on what foundation it happened. I believe I know more clearly now, and with research about the workings of the weighted indexes, I'm sure my understanding is only going to improve.

  10. #10
    Junior Member Oxster10's Avatar
    7
    If you sold Euro for example for the yen. . The price in EUR/USD wouldn't drop it would go up because you sold EUR..meaning someone else must buy off it you..and eventually drop down. Anyways lets just go together with your query you sold euro . . price drops. . But you wonder why price drops in EUR/USD even though pair is untouched. . This happened because the euro dropped.

    Your EUR/JPY example. . When u buy the euro and sell. . you arent buying the euro and selling the yen. . You are buying the euro and selling the euro. When you sell and go short. . You are buying the yen and selling the yen.

    Its my fault I didnt understand your question before. sorry

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