Who Prevails in Strong Verse the Weak… Traders Do

When an asset is strong, it can rise heavily, like when a share goes up after having a strong quarter. But what about when an asset is traded as a pair, and one of those pairs are very weak while the other is strong?

The amplified effect that can have on the currency pair makes it a sitting duck for traders looking for strength vs weakness, allowing them to maximise their chances and have more certainty in their trades.

Traders using crosses while considering the amplified effect of strength vs weakness will more likely benefit greatly, compared to those who stick to pairs that are more aligned. This of course depends on their strategy and style of trading.

 

Strong Currency Traits

What makes a strong currency?

A currency is made strong by its fiscal and monetary policies that back the currency. The Fed makes decisions around things like interest rates and printing money, effectively deciding the fate of the USD.

A strong currency is characterised by the central bank that impacts the currency, such as the Fed to the USD, where the Fed is aiming to strengthen the USD.

This can be determined by factors that increase the value of the USD against other currencies, like raising interest rates. This helps to reduce inflation, and influences people to hold USD for the positive interest rate return. That means more demand for the USD with less deflationary impact of inflation taking hold and thus the currency has more reason to strengthen.

Certainty and stability also hold strong when it comes to currencies. When a country appears stable and as though the currency will be around for the next 100 years, this is a positive. Strong leadership and little conflict help the perception of longevity in a currency.

 

Weak Currency Traits

What weakens a currency?

When it comes to printing more money, less is more. The act of printing money devalues a currency as supply increases. While demand may rise during a supply increase, the act of printing generally deflates the currency value and can partly cause the cost of living to increase. This is often coined quantitative easing and involves large amounts of money being printed and released into the economy, weakening the local currency.

If this is the case, why print more money?

Printing money can cause devaluation of the currency, making the buying power of other currencies higher and the goods and services of the country printing the money to be lower cost fon a global basis.

To remain globally competitive, a country may choose to ease their currency value and place influence towards more exports.

Other weak traits include poor economy, unstable government, conflict and uncertainty around the future of the currency or simply a downward cycle overall for the currency and economy.

Other considerations when thinking about influence over a currency, is their major industry and exports. Countries are known for their natural resources and economic outputs, for example, Canada and Australia have vast natural resources, and those resources heavily affect the currency demand, and the resources. A low local currency value means the resources may be more valuable to a stronger foreign currency holder, effectively making the resource cheaper.

Some exports are cyclical, which can also impact the value of currencies and determine whether they are strong or weak at each phase of the cycle.

Consider plant based exports that operate seasonally, like cotton. Farms yield cotton during the harvest, but in the off season as the plants grow and are taken care of, there is little activity in terms of exports.

 

Trading a Currency Pair that is Strong vs Weak

When one currency is clearly strong, central banks are promoting higher valuations while exports are also strong and the government is stable, while another currency is weak and deflating the currency value as exportable goods are not available or non-competitive globally.

The effect is often a trending currency pair, with more reasons than not to go one way as both currencies are in disparity of each other. With this added certainty, investors and traders often jump on the bandwagon and help the currency pair along by trading in line with the market expectations.

 

What Traders Suit This Style of Trading?

Often trend traders and fundamentalists will prefer this style of trading, as it can take time for the market to react. It is certainly not a form of scalping, and trades like this can run for an entire cycle which can be months or even years.

This style of trading does require patience, and an understanding of fundamentals such as central bank decisions and intentions long term, on both sides of the currency pair.

 

Where to start?

Using the FXT Economic Calendar, you may be able to get a feel for the announcements and data releases, along with the intention of central banks, decision makers and the general economy. Open a live account and open a world of opportunity.