Small Economy Vs. Big Economy Charts

Just like in the stock and futures markets, there are always things that seem to lead the way of the larger markets. For example, very often a few of the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google/Alphabet) will lead the S&P 500 and Nasdaq higher or lower, or even just watching the Nasdaq in futures will often lead the S&P futures market. In Forex, oftentimes a smaller currency pair will lead the direction of a larger pair. 

Now, when I say smaller vs. larger currency pair, what I’m really referring to is the respective size of the economy, or Gross Domestic Product (GDP). Looking at the last full year, according to the International Monetary Fund, the GDP in 2018 for the major forex currency countries was as follows:

United States USD ~ $20 trillion
European Union EUR ~$18.75 trillion
Japan JPY ~$4.97 trillion
United Kingdom GBP ~$2.8 trillion
Canada CAD ~$1.7 trillion
Australia AUD ~$1.4 trillion
Switzerland CHF ~$703 billion
New Zealand NZD ~$203 billion

As you can see, New Zealand’s GDP is the smallest of the major currency economies. So, we could use their chart to clue us in on what to do with say, the Australian currency. Since the NZD is smaller and, therefore, probably easier to move around than a larger economy’s currency, theoretically it should move first. Let’s take a look at a couple of charts!

(Click on image to enlarge)

Chart comparing the NZDUSD with the AUDUSD

Above is a percent comparison chart on the NZDUSD pair (in red) and the AUDUSD pair (in blue). When looking at the massive difference in the two lines from about June 15-June 18, you can plainly see that the red line marked 1 is pointing up-bullish! At the same lows, the blue line marked 1 is pointing down-still bearish! But since the NZDUSD (red) usually leads the AUDUSD (blue), a trader could have started to look for a long trade in the AUDUSD as the NZDUSD was leading the way! By using this divergence as a clue to buy the AUDUSD, you could have entered your long position at about .6838, from a demand zone that dates all the way back to 2016.

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