So now we move on to the largest and possibly the most important video of the whole course. And that's determining whether a currency is strong or weak. You've heard me mentioned already how important it is to pair a strong currency against the weak one for the largest possible moves. So the first step that needs to take place is for us to determine which currencies are strong, which are weak and then put them together. Now a currency strength or weakness, it can be determined on two timeframes, a longer term timeframe, so three months on words, and a shorter term timeframe I, whether it's strong or weak off the back of a news event, which is up to date. It's fresh, and it's real, and it's happening right now, on a much shorter timeframe.

So we're going to look at both aspects. And what we're looking to do is get both saying the same thing. So that bigger picture is suggesting the currency is weak. And the news is also giving us some short term weakness and vice versa. So let's now go into the nitty gritty of this particular topic. So, what we must first do before we even think about a trade is consider and identify for all the currencies in the last chapter, whether they are strong or weak overall, when we know this, we can then determine whether we should be buying or selling that particular currency that helps us with the direction Remember, we're speculators on direction, we need to know which direction we should be trading in should we be buying it or should we be selling it?

It also gives us the potential to pair a currency irrelevant what it is against its opposite, ie a weak currency. And we pair it against a strong or like I've just mentioned or vice versa as you'll see in the next Topic when we trade weak against strong or vice versa, it provides the highest probability one directional trading opportunities and that's all we want to focus our attention on. And as I mentioned before it previously is we can observe both the long term and short term strength or weakness of a currency pair, which we'll look at very shortly. Okay, so let's first start with long term with a bigger picture. What's the bigger picture of a currency is it generally weak or strong? Well, the strength or weakness of a currency over the long term, three months or more is driven by whether a central bank remember the major player of a nation is getting closer or further away from an interest rate hike, or cut.

A central bank, as we saw before will decide on their stance whether they want to cut or raise rates based on several months of data. So a string of good data or string of bad data will get the central bank their stance on the overall economy and what certain policies or strategies that they will adopt to either improve the economy or keep it in check and stop it from becoming a bubble. One of the main main tools that they will use as a strategy or as popular as a policy is a rate cut or a rate hike. This is why it has such an influence on whether a currency pair is strong or weak on the long term perspective. Now, as it says there run a good solid data on key data points encourages the central bank to become more likely to raise rates. Why did they do this?

Will they do this because if they're concerned that everything started to pick up momentum, what they don't want to do is that momentum to become dangerous. So by raising rates, it just keeps that speed of growth and speed of development in check. Now, this makes it good for a local currency and it will give it strength As money will flow into that currency, think of yourself as a big, big investor Do you want to hold, buy and hold currency that has a good interest rate or a bad, it's good. So if you've got a nation heading towards rate hikes, you'll get people start to buy or long term investors start to buy that local currency, because they're going to get a better return on their investment. Now, in contrast to that a run of bad data in an economy will encourage the central bank to become more likely to cut rates because they'll cut the rates because it's a great tool to use to help stimulate the economy and start helping companies helping individuals and getting that economy going.

However, it's actually bad for the local currency and it will give weakness why is because money will flow out of that currency. So if you're holding euros, for example, and they've just cut their interest rate, you're not really going to be happy holding euros for much longer. Because your return on your investment has just been reduced. So what you're going to do is you're going to sell euros, and you're going to buy a currency, which has the likelihood of an interest rate or they're in an interest rate hiking cycle. So interest rates going up good for the local currency should strengthen it, cutting interest rates or the threat of cutting interest rates, bad for the local currency, and we should see that currency weaken. So that's how we determine the long term bigger picture on as to whether a currency is strong, or weak.

And the best way I used to illustrate that is the strength stroke weakness scale. And this will give you a better, more high level view of what it means for a local currency. So this top little scale here is the central bank stance. Are they neutral, so the economy is okay, but it's not great. So they're not really moving towards a rate cut, or a rate hike, so they're very neutral. That doesn't really give us any body Either way, so neutral central banks are great, because it doesn't really give us a bias as to whether they're likely to strengthen or weaken their currencies.

Now, however, if there's a run of bad data in the economy, then a central bank will move towards cutting rates. If there's a run of good data and everything's looking rosy in the economy, the central bank will start moving towards raising rates. So as we see from this bottom scale, which links in to the one above it is, if we head towards rate cuts, it weakens the currency. If we're heading towards a re a rate raising, or a rate hike, it will strengthen the current currency for the reasons that we mentioned in the last in the last slide. So bear that in mind, and also if a central bank has no bias, or is neutral, that the currency pair will be hard to trade because we don't have it strengthened. Or weakening, which will be used in our whole trading plan.

Let me give you an example to back that up. So to say, Hey, we're back on forex factory. And we use this quite a lot as we go through through two topics on Wednesday, June the 10th. So at the time of recording this, this course was very recent, it was a month ago, and June the 10th, at 10 o'clock London time, the Reserve Bank of New Zealand, which is the Central Bank of New Zealand, they cut their interest rates, at the same time they communicated via their statement to the market. So they said to the market, that we are concerned about the economy, and we'll cut again if we need to. So going back to our scale, this was essentially the rbnz at the Central Bank of New Zealand, heading towards cutting rates, so they cut their rates so what does that mean for the art the New Zealand their local currency, it should weaken the kiwi dollar.

So as we see here, immediate weakness ran through the key weight and lasted not several hours, but Several weeks. Because of this, we would have a bearish bias and would only want to sell the kiwi against a stronger currency pair. So we started to bring things together now, we understand what the central bank's thinking, we know what the big institutional traders will be thinking. And we think exactly the same thing. Cutting interest rates and having a gloomy outlook on the economy is bad for the local currency, we would only want to consider selling the kiwi dollar. So we have our direction on the kiwi we only want to be selling it.

So I'm looking at the chart at the time of that reason. We've already looked at it before, but it's bringing it all together. Now. This was the chart that we've read the chart of the kiwi dollar on the hourly timeframe. And as you can see, there was a there was a move of 130 pips lower from the initial news announcement. And the reason for that was the fact that the data was bad for the currency.

Cool. causing it to weakened significantly against the United States dollar, which was a stronger currency at the time. So that is just confirming to you that the bigger picture was negative based on the Central Bank of New Zealand, cutting rates and having a gloomy outlook on the economy. Now, this is another example but this is one in the future this hasn't happened yet. So how can we determine what the overall bigger picture is for the Canadian dollar for example? Well, we can check on forex factory again on Wednesday, July the 15th.

At three o'clock GMT, we will be getting the Bank of Canada's monetary policy update and their rate confirmation. So this is them telling us what they have, what their thoughts are on the Canadian economy. Are they bullish? Are they bearish? Are they neutral? So as a trader, we will be looking to digest that information so that we can Get a directional bias on the Canadian dollar.

So every single month, each of those developed nations will update you on their outlook for their own economy. And your job is to digest that information. So you know, whether that local currency should be strengthening or weakening. So you can build that into your trade plan as to whether you want to be buying or selling that particular currency. Just to give you a high level view now, this is as of July 2015. This is what the current central bank state stances for each of the major developed nations and the currencies that we're looking to trade.

So the US dollar, we've got the Fed, which is the Central Bank of America, they are heading towards a rate hike at some point in 2015. So what does that mean what a rate hike is good for the local currency So as I've put in the box here, the dollar is a Strong currency right now, on the bigger picture timeframe, the Euro, they've cut rates to record lows and their intent on keeping them low. So that is generally the Euro is weak as a currency. The parent is heading towards a rate hike, but not as quickly as in America. So towards the back end of 2016. So it's strong, but it's just not as strong as the United States dollar.

But it is stronger than all of the other currency pairs that we're looking at. In Japan, the Bank of Japan have got rates at record low interest rates at record lows and their intent on keeping them low for the foreseeable future. So that means the yen is very weak right now. That's the same in Australia, the same in New Zealand. They've both cut their rates in 2015 and have said to the market and communicate to the market that they will cut interest rates again. So the Aussie and the keywords are generally from a longer term perspective, weak currency pairs, Canadian dollar They also Bank of Canada cut rates in January 2015.

And they've said that there is potential for further cuts. So the Canadian dollar is also weak. And then finally, Swiss franc, they've got negative rates. So they're actually minus naught point seven, five I believe, and they're intent on keeping them low as well. So the Swiss franc is generally a weak currency pair, as well. Now, note, this situation can and will change over time.

Therefore, it is key that we monitor central bank meetings to see if they change their tone. I've already given you example of one which was the Canadian monetary policy meeting which takes place next week on the 15th of July. If they change their stance, we as a trader need to change our stance. So if they come out and they're bullish, and all of a sudden they start talking about rate hikes. All of a sudden, we will change from having a weak opinion of the cat to a strong opinion. And so we'd be looking to buy the Canadian dollar rather than Senate.

So your job as a trader is every month, just keep in touch with the central banks because they will dictate whether their local currency is getting stronger or weaker from a long term perspective. What I want to do initially because it takes a little bit of time to really be able to digest what a central bank is stating, but I will support you every single month. So what you'll see is there is a current up to date, currency focus, downloadable list in the curriculum of the course. And this will give you have a detailed summary of each currency, what the central bank stances and what the bigger picture is for the currency strong, weak or neutral. And what I'll do is I'll update this every single month after a central bank have communicated their latest view. And what this will do is it will keep you in tune at all times.

You just need to come back and read that report to make sure you know what your thought process is on each and every single currency. Whether you're Got a strong bias or a weak bias because as we'll see in the next chapter, how important that is, so I will support you with that every single month by updating this currency focus list. Your job is just to read it, digest it and utilize it in your trading plan. And before time, once you've read them for a few months, you will start to be able to do it yourself. You won't need that report you will know what to look for what to listen into, and that will give you an understanding of whether a currency is strong or weak.