The Australian and the Canadian dollar are often grouped together as commodity currencies. Their day to day correlations with the Euro are very high but their betas are highly variable so the price charts can look quite different. If we used the Euro Fuel Gauge by itself to trade them, we’ll get rather mixed results because of those problematic betas. The rules:
- Buy if the Euro Gauge > 75
- Exit the long position if the Euro Gauge crosses below 50
- Sell short if the gauge falls below 25
- Buy to cover the short if the gauge rises above 50
There are no stops or profit targets. These values (75 and 50) are the best possible levels (using increments of five). This is what the profit curve looks like:
Now we’ll see how well the same filter/system works on the Australian dollar. The rules are the same but this time the best solution is 70 and 50 respectively.
Neither result is compelling so let’s consider making a small adjustment. We know that the Yen is a sort of enemy to commodity currencies. If the Yen is rising due to a rise in global fear or western capital flight then that is especially bad for the C$ and A$. If the Yen is falling due to a rise in global commodities, that is good news for the pair. We can sort through days where the Yen underperformed the Euro when the Euro rose and the converse to see if such performance differentials explain price behavior. There are 4 cases to view – 2 for each currency:
The performance differentials are stark. Now we just need a way to know, ahead of time (if possible) how the Yen is going to perform versus the Euro.
This leads us to consider a new index to help us trade these other two dollars. We can use the Euro Fuel Gauge but subtract the Yen Fuel Gauge from it. We’ll let a machine figure the weighting. In both cases it arrives at a -.7 so our new index = (EuroFG – .7*YenFG)/.3 This new index will be much more volatile than the normal 0-100 range. It can easily become negative and often rises above 200. We’ll use an entry threshold of 75 and an exit threshold of 50 for both currencies.
That is very solid considering there are no stops or profitable exit rules. The A$ equity curve looks like this:
This is not as good as the C$ curve but vastly better than if we just use the Euro gauge all by itself. In both case you can add your own filters. If you do then you’ll need to lower the new gauge threshold so as to get sufficient signals. If you are a pure discretionary trader this analysis should confirm a feeling you had, telling you to position your book in A$ or C$ when you have a strong (positive) opinion on the Euro and a much weaker or negative view of the Yen.