How many headline commentaries time and again reported this story: NZD outperforms the EURO 0.8 vs 0.7 or 0.6. How many times does a trader say why didn't I buy or sell NZD instead of the Euro to gain an extra 20 pips or so on the trade. The answer to these questions must come with understanding the difference between the two pairs in its orientation and its man made creation to align each pair towards its stated nation goal and purpose.
Currency pairs may be aligned for strictly export purposes (JPY), some pairs are aligned with a specific nation or continent to gain economic trading advantage (NZD), some pairs align as a peg or crawling peg to insure further its economic gain is insured, (DKK). Still other pairs are aligned with a specific nation or continent to purposefully underperform, (AUD/CAD, EUR/GBP, EUR/CHF) to hold a range.
NZD Vs EUR. NZD always outperforms the EUR by easily double even triple pips but that revelation is never seen in the reporting of NZD outperformance of 0.8 vs 0.7. Take the last weekly pip movement of the EUR/USD and NZD/USD pairs. EUR/USD moved 12 pips as measured by the weekly candle compared to NZD/USD 208 pips. The daily EUR/USD candle moved 32 pips vs 62 for NZD/USD, a large factor.
Trading Days. Minus weekend and holidays, NZD is aligned as 253 trading days and matches exactly with 253 US trading days while the EURO calculates to 258 trading days. The difference between the two pairs is one week of trading days and can be a crucial factor in any pip targeted calculation. Consider a one week move for the Euro. One week may be a factor of 200- 400 pips depending on economic conditions and possible trend scenarios. Yet factor EUR/NZD in the equation and pip forecasts can be wildly off target.
NZD Central Bank. The Royal Bank of New Zealand is by far one of the smartest central banks in the world but they must be because they wish to remain a market economy and a partner to the world's market economy. To accomplish this feat and overcome massive time zone differences, the RBNZ aligns itself to the US economy to remain a viable partner to the US so its currency gains appreciation against the USD. This alignment was a man made creation by the RBNZ yet created for market trading to determine a viable NZD/USD market price.
NZD Vs EUR Characteristics. What is found in this trading day scenario is NZD/USD will trend smoothly with slighter volatility than EUR/USD while the EUR/USD will see much volatility constantly. Its the nature of this pair due to its ability to remain in overbought and oversold territory for long periods and because the EURO is the most widely traded pair. Its not unusual to see $400-600 billion of Euros transacted on any given day. What is an important benchmark to determine shorter term direction for both pairs is the technical set up of the weekly chart. If NZD outperforms EUR, a weekly chart will tell us how far and when will the retracements occur.
Stay tuned as Brian Twomey again goes Inside the Currency Market. The book is found at btwomey.com