Currency correlation between Aud Nzd and Eur Chf

Hello everyone

A little update about myself, i just been retrenched from my previous job and i have just started my new job with NCS. I am still waiting for their clearence. without their clearence i cant do anything, and so i am basically doing nothing everyday for the past 2 months here. everyday reached late go home early, whole day do nothing but read my book and surf internet.
This is also why i been updating my blog so often, i cant waste my time here, so i bought my books and do my reseach here, people here think i am crazy. but i dun care abt them la. i keep writing my economics theory here in my blog.
life soooooo shiok here! if only i can do this kinda job everyday, then i no need to trade already, everyday i will love going to work.

ok now talk about forex correlationship
If you have been checking out currency rates or looking at forex charts, you would have noticed a strange similarities between Aud/Nzd and Eur/Chf. When ever Aud go up, Nzd will also go up. When ever Eur go down, Chf will also go down. isnt this strange? both are different countires but their correlation is almot >90%. when you look at them from a chart, it is almost like they are 2 mirror reflections.
Why is this so? i will try to explain this now.

Lets first start by saying a bit about history first. after the breaking of Bretton woods, which is a fix rate. Swiss Fran initally pegged itself to France Fran during the late 1970s. but shortly during 1980s, Swiss Fran then pegged itself to German Mark. After the formation of the Eur. Swiss pegged itself to Eur now.

Why does the Swiss Fran keep swithing pegging? from France Fran to German Mark and eventually now to Euro. The answer is logical and simple. It is because of Trade.
A example will be fisher man exchanging fish with farmers for crops. trade is the main reason why humans will gather together and live close to one another. this is how important trade is to mankind, in fact this is the reason why civilaization was created.

It pegged its currency firstly to France fran becuase France was then Swiss biggest trading partner. Then German became Swiss biggest trading partner, and now eventually it is the Euro as Swiss is right in the middle of Euro zone. It is the same reason too why Aud and Nzd have such strong currency correlation too. The strong currency relationship is due to the strong trading relationship between the two countries.

Now you might ask. so what if Aus is NZ main trading partner? why does it affect the currency rates? Well being their main trading partner ,it has a huge affect on the currency rates. This is because everytime aus wish to trade with nz. it must first check the currency rates. (read my another posting about Exchange limits). If their currency rates are being kept pegged together and their movement is very smiliar to one another. then the currency rates movement will not be a problem or an barrier whenever they wish to trades. To archieve this type of correlationship, the countries involved must be commited to maintain such a relationship, actions need to be done by the respective central banks to maintain the rates and make sure it does not go out of equilibrium.

A country will tend to trade primarly with neighbouring countries. Transport cost will means that a country will trade more with its neighbours and less with distand countries. The profits of trading are reduce by transportation cost. Transportation is a obstacle to trade.

if two countries become mutually dependent on each other for important resources and commodities, then it becomes more diffcult for them to separate their economics against each other. Because extensive trade relations require frequent contacts.



Ok now comes the next questions, If their trading relationship is so close and their currecny movement is almost the same, then why not just form one currency? why still need two different currency?

Ok to answer this question lets again go back to history.
Shortly after Bretton woods, the European Monetary System was formed (EMS). Until 1992 there were 9 full members (Belgium, Denmark, France, Ireland, Italy, Germany, UK, Netherlands and Luxembourg) Members agreed to maintain the exchange rates within one another.

The EMS Bundesbank was tightening rates in 1991-92 to tackle inflation, just as UK was entering a recession. The conflict between the EMS raising rates to tackle inflation and UK wish to lower rates to tackle recession, eventually force UK to leave EMS and return sterling to a floating exchange rate. Italy which was encountering similar problems followed UK a few days later.

There are lots of advantages of a single currency between close trading relationship countries but one huge disadvantage remains. Individual countries would not be able to use monetary policy or exchange rates to deal with different economic circumstances during business cycle.

a bit chim to understand becoz i just copied from economics textbook and never really rephrase them in lay man easy to understand terms.
but should be able to understand la, coz its simple logic nothing very difficult hehe