A simple test using an Australian dollar and U.S. dollar index chart shows a different relationship. There are significant periods of divergence in trending behavior which suggests that Australian bank and economic circumstances are an important factor in Australian dollar behavior. The dollar index has changed by 7.4% starting December 2009 and ending March 29. During the same time period the net change in the Australian dollar is less than 0.05%. This divergent trend behaviour does not exist with the relationship between the euro-dollar and the dollar index.
Despite the wringing of hands and gnashing of teeth, the weakness in the euro-dollar is significantly driven by the strength or weakness in the U.S. dollar index. Daily fluctuations are created by the short term responses to news stories from Europe, but the longer term trending behavior is directly matched to the behaviour of the U.S. dollar index. There are trading advantages in following the relationship between cause and effect when it comes to analysing the euro-dollar.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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