Have you ever wondered how to select the currency pair you should trade? Well, the answer to this question is quite simple: buy the expected strong currency and sell the expected weak currency.
How are you doing that? The answer lies in the fundamentals. If you expect the JPY to appreciate due to risk aversion sentiment, you buy JPY and sell AUD, which is the commodity currency that generally performs worst in risk aversion scenarios. In this case, you are shorting the AUD/JPY.
Let’s look at another recent example. In 2021, with inflation well above the Fed’s 2% target and slowing global growth caused by inflation and China, you would expect the Fed to tighten policy sooner and even more. quickly than expected. So you think the USD is going to be strong. On the other hand (even though all USD pairs are affected by USD strength or weakness), you see that the AUD having a dovish central bank and being more exposed to China’s slowdown is going to be weak. Therefore, you are looking for short opportunities on the AUD/USD.
If you are trading two equally strong currencies with perhaps both their central banks in a hiking cycle and both being at risk on the currencies, you will most likely struggle as the pair can simply swing and vice versa for two also weak currencies.
So if you have a good idea on a single pair, trade only that pair. I cannot stress enough that your job is not to trade but to make money. Don’t make the rookie mistake of picking pairs just because they are more volatile than others. More volatility does not necessarily mean more profits.
This article was written by Giuseppe Dellamotta.