A strategy we like to employ is Pairs Trading. Trading currency Futures is Pairs Trading, since we are trading the US Dollar versus various foreign currencies. Since we also believe in product neutrality, as long as there is proper liquidity, we are providing this overview of three actively traded currency Futures. It’s especially appropriate given the large currency moves since the Presidential election, the Brexit vote and Sunday's referendum vote in Italy and its impact on the Euro.
The three most actively traded currency pairs are the Euro/US Dollar, US Dollar/Japanese Yen and the British Pound/US Dollar. A closer look at the EUR/USD currency pair included the current rate, what 1 Euro buys and what 1 Dollar buys. The Euro, like each of the currencies, is quoted in terms of how many dollars they can buy. A table of the currency Futures as a way to gain exposure to these Pairs Trades was displayed. The table included the /6E (Euro Futures), /6J (Japanese Yen Futures) and the /6B (British Pound Futures). It explained the reaction of the different Futures when the Dollar strengthened or weakened. Another table displayed the notional value of the Euro, Yen and British Pound Futures and their mini-Futures products. Tom and Tony warned about using too much leverage.
A correlation table was displayed. Each currency is valued against the dollar so a negative correlation between the currencies is a given. The Euro has the greatest negative correlation to the Dollar. The high negative correlation and strong liquidity enable a trader to use the Euro Futures to trade against the Dollar.
Watch this segment of Best practices with Tom Sosnoff and Tony Battista for the valuable takeaways and a better understanding on how to trade currency pairs.
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