Pairing Currencies Profitably
Just quickly following up with a question from Rolando, asking whether when we have a mixed risk-tone, is it a good idea to pair a safe-haven against another safe-haven?
Maybe, comparing the Yen against the Swiss, for example. And when we have a mixed risk-tone, is it a good idea to pair a high-beta against a high-beta, for example, the Aussie against the Kiwi.
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So, first of all, thanks for the question, Rolando. Looking at the answer, we first need to always start with the sentiment and the fundamentals, right?
So, if we take risk completely out of the equation, so no risk-on or risk-off, just a mixed risk-tone, and so, no expectations, for example, for safe-haven inflows or outflows to support or pressure those currencies, then we need to have a particular sentiment or fundamental reason for expecting one of those two currencies to be weak and the other one to be strong. So, just take a hypothetical example, right.
Let’s suppose that the Aussie dollar is being supported in today’s session, because we had a really big beat in employment numbers, and the RBA have signaled that employment numbers are very important for them. So, that beat is currently keeping the Aussie supporter in the session. Now, for us to take a trade for, with the Aussie against something like the Kiwi dollar, for example, we would need another catalyst that is actually at the same time pressuring the Kiwi dollar as well.
So, let’s suppose that at the same time we expect the RBNZ to cut rates next week, just an example. That would mean that we expecting weakness for the Kiwi dollar on the back of that. So, now we have a reason, a reason apart from the risk-tone to expect weakness in the Kiwi and strength in the Aussie.
So, that’ll be a great opportunity for us to pair those two currencies together.
And then, the great thing about the two of them sharing that same risk profile, being high-betas, it means that by pairing them together, even if we get a strong risk-on or risk-off flow, we expecting them to move more muted and move more in tandem together, which means that once that risk-tone plays out, we obviously expecting the overall bias to stay intact and the currency pair to move in line with that overall bias.
However, there are a couple of considerations that we need to keep in mind when we pair safe-havens with safe-havens and high-betas against high-betas. And that is the type of risk sentiment shifts that might occur. For example, let’s say that you are trading that example we just had with the Aussie Kiwi to the upside, for example. You know that a risk-on or risk-off tone should affect both of them the same way.
But if the reason for the risk-tone, let’s say it’s a negative risk-tone that develops, for example, it’s something specifically to do with China.
So, let’s say the US threatening China with tariffs or something like that, that news should impact the Aussie dollar a lot more than the Kiwi dollar due to the dependency that the Aussie economy has on China. So, it really does depend on the type of risk sentiment as well. Another example would be oil prices.
So, if oil prices are tanking across the board, and that is causing a risk-off flow. Yes, we can expect that risk-off flow to affect the Aussie, and the Kiwi, and the CAD, but we would expect that to have a bigger impact on the CAD, due to its dependency on the oil market.
So, there is a couple of considerations that we need to keep in mind when we pair safe-havens with safe-havens and high-betas with high-betas. Obviously, firstly, we need to have a real reason for expecting strength and weakness in the one and the other. And then, when we have that type of risk sentiment flow, just make sure that the type of risk sentiment won’t be something that skews the risk profile for those two currencies.
So, I hope that helps you, Rolando. Any other questions, as usual, don’t hesitate to let us know.