One of the key trading principles is to look to pair a ‘strong currency’ against a ‘weak one’. In doing this you are stacking the odds in your favour of the trade going in your desired direction.
So, how do you define a ‘strong currency’? A strong currency is one that has specific reasons for its strength. Here is a recent example. Let’s say that there is a +1.73% spike in the oil market on supply concerns. Which currency would that benefit? Well, it would benefit countries that export oil. e.g. Canada and Norway. In this instance, we would expect CAD and NOK strength.
Now, what about a weak currency? Well, a weak currency is a currency that has specific reasons for its weakness. Let’s take another example from recent news and imagine that a number of Bank of England members are releasing news comments which indicate that they are in favour of rate cuts. When a bank cuts interest rates the value of the currency goes down. So, in this instance, we would have our ‘weak’ currency, the GBP.
Continuing to use this hypothetical example you can see we now have a ‘strong’ and a ‘weak’ currency. This would give us bias for trading the GBP/CAD or the GBP/NOK Short. Any retracements on these pairs would be potential areas to short from.