Arbitrage is a common term in the finance and trading industry. It describes the exploitation of differences within similar or the same assets. In the first case, for example, a clear difference between the Brent oil price and WTI would be tradable by choosing the value that usually lags behind the other. In practice, further differences between stock exchanges and maturities are used, but with the same value.
Arbitrage transactions are also primarily carried out by hedge funds in the bond sector. However, these differences are so narrow that only investment banks or very good computer systems can take advantage of such arbitrage opportunities. The private dealer will usually not even be able to identify them. So the only question for him is to trade such a technique between comparable values.
How do you recognize differences?
Homogeneous or equivalent values follow each other in price, but not exactly in price, but in the course. The difference in synchronism is also known as the spread. Occasionally, however, the spread widened due to fundamental reasons. If, for example, a certain average spread was found between the two types of oil with regard to a period that is widening, traders can speculate that this spread will narrow again over a certain period of time.
In the end, the whole thing also has a self-fulfilling one Effect, because arbitrage is used to a very high degree of probability in practice, so the spread should narrow for this reason alone. Such differences also exist on a particularly short-term basis between currencies.
Australian dollars and New Zealand dollars - arbitrage technique
The two currencies Australian dollars and New Zealand dollars have a strong correlation due to the bilateral relationship. However, both are also very dependent on raw material prices. Therefore, arbitrage would also work unless there is a very large interest rate differential between the two currencies. First of all you have to determine which of the two values acts as the so-called pioneer. This can be done using a benchmark analysis. In our case, the New Zealand dollar is currently leading. However, that can change.
Comparing the two charts, it is clearly evident that the Australian dollar is in a sideways trend with a slight downward trend against the US dollar. This can be seen from the three ever-increasing highs on a 15-minute basis. However, the New Zealand dollar is currently even stronger against the US dollar and has rising highs. Therefore, it would be likely that arbitrage traders will use the Australian dollar for short-term trading because it has not yet adjusted and the spread between the two currencies is currently widening.
Let's look at the course of the two currencies, we see that the New Zealand dollar is now rising on a short-term basis. If this trend continues, there is a chance that the Australian dollar will break the resistance above the highs and then leave the sideways range.
According to the chart, the Australian dollar has been in the same period not yet moved up so much, but also shows a tendency there. It was not sold out. That alone is a signal that the strength of the New Zealand dollar has supported the Australian dollar.
Profit from movements in currency
Arbitrage techniques are not easy to implement because they are mainly used by professionals with very fast Systems. However, every now and then traders should keep an eye on correlations between similar values in order to identify unusual differences. The example above is only to be understood as a suggestion and does not necessarily have to work, but is only intended to clarify that arbitrage can also work in the Forex area, but at least can indicate certain weaknesses or strengths.
The currencies of the Australian dollar and New Zealand Dollars are tradable through most brokers.