Can Cross Pairs Be Traded During Risk-on/off Environments?

Cross pairs can generate large and predictable moves during risk sensitive times. Always try to pair safe haven currencies against high beta currencies.
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Trading Cross Pairs During Risk On Off Environments

We have a quick question here from Cortes who’s asking us, “Is currency pairs like the Euro Aussie and the Pound Kiwi as an example, considered as risk currency pace?”


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Now Cortes, we will answer this question in two stages. Firstly, let’s quickly see which currencies are considered risk sentiment currencies and why. So on this page we can see that we have two sections, we have two types. First one is a safe haven. and then we have a high beta currency.

Now we can see during risk-off environments, we expect the safe haven currencies to strengthen and during risk-on environments, we expect safe havens to weaken. High beta currencies we expect to weaken during risk-off and strengthened during risk-on.

Now looking at the currencies more specifically, safe havens generally are considered the Swiss Franc, the Japanese Yen, and in some situations the US Dollar depending on the overall health of the global economy. And then looking at the high betas, that will be considered like your your high rates of commodity link currencies like the Australian Dollar, the Kiwi Dollar, as well as the Canadian Dollar, also the emerging market currency.

So, during risk-off tones we expect the Swiss Franc and the Japanese Yen to strengthen while we are expecting the Aussie, Kiwi, and CAD to weaken and during risk-on environments we’re expecting the Swiss Franc and the Japanese Yen to weaken, while we expecting the high betas like the Aussie, the Kiwi, and the CAD to strengthen. Then coming back to the Euro Aussie and the Pound Aussie, we can also look at the Euro Kiwi and the Pound Aussie for examples. The Euro and the Pound is not traditionally thought of as having too much reaction when it comes to risk tones there has been exceptions of course, but generally speaking they tend to be more neutral when we have strong risk flows.

Now when we have a strong risk often, we obviously expect the Aussie and the Kiwi and the CAD, for example to weaken. Now that would give us theoretically an upside buyers in pairs like the Euro Aussie and the Pound Kiwi, and when we have a strong risk on tone we would expect the Aussie and the Kiwi and the CAD to strengthen which means that we will have a downside buyers, for example on the Euro Aussie, the Pound Kiwi, and even the Euro CAD, Euro TB, etc.

But, and this is a big but, we only consider that a tradable opportunity if we have the opposite bias in the Euro and the Pound at that time. For example, in a risk-on turn we would expect the Aussie, the Kiwi and the CAD to strengthen, so we would want a catalyst, a specific catalyst that is driving the Euro or the Pound lower to consider that a higher probability or high conviction trading opportunity.

Now if there is nothing driving the Euro and nothing driving the Pound lower at that time, you would be better off just burying a safe haven like the Swiss Franc or the Japanese Yen against that higher beta currency with very strong risk-on and risk-off flow.

That goes the same for something like the Euro Yen and the Pound Yen, for example if we have a strong a risk-off turn we expect strength in the Japanese Yen and the Swiss Franc that’ll mean that, that should give us a downside bias in something like the Euro Yen and the Pound Yen.

But we’ll only consider that a tradable opportunity if there is something specific driving the Euro or the Pound down at that time otherwise we would just pay a strong expected safe haven against a strong expected high beta.

So Cortes, I hope that answers your question if there’s any other questions please don’t hesitate to let us know



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