Discussion in 'Forex Trading' started by fengshui-123, Oct 6, 2005.
Could someone explain?
Sure. EUR/NZD is a minor, relatively illiquid pair, which is a cross of 2 major pairs: EUR/USD and NZD/USD. As such, its movement is solely a function of the movements in those 2 majors; it cannot move independently on its own, because of arbitrage. If euro is at 1.2060 and kiwi is at 0.6970, then EUR/NZD must be at 1.2060 / 0.6970 = 1.7303.
Now, we all know that euro and kiwi are each fairly volatile in their own right. And, equally important, they are uncorrelated with each other. For instance, over the last 5 days, their daily correlation was -56%, while over the last 20 days, it was +78% (from mataf.net). Not stationary (stable) at all. In simplified, non-statistical terms, on any given day, euro and kiwi can move just as easily in opposite directions as in the same direction.
Combine the two factors above, and you end up with routine 150-200 pip daily range for EUR/NZD, or greater volatility than either of its two component majors. However, that's in absolute, pip terms. In relative, % terms, its volatility is not out of line at all, thanks to its higher numerical quote.
ok, I'm a bit late to the party... but... just wanted to say, awesome explanation. I found this wading through many google search results, and this is the answer I was looking for. kudos
Not this pair is much stable. Just no reason for serious fluctuations as it was before
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