In late 2007, China replaced Japan as Australia's largest trading partner. In 2009, China became Australia's largest export market, consuming record quantities of commodities such as iron ore, coal, natural gas and wool.
According to data released by the Australian Department of Foreign Affairs, the total trade volume between Australia and China reached US$105 billion in 2010, almost 24% higher than the previous year. This is the first time Australia's two-way trade with the same country has broken through the $100 billion mark. Four decades ago, two-way transactions between China and Australia were less than $100 million.
For this reason alone, Australia's economy tends to run in the same direction as China's. Australia's currency also tends to strengthen when China reports a good PMI, GDP or trade balance. Likewise, the Australian dollar tends to fall when Chinese data disappoints.
This strategy trades AUD/USD by taking cues from China's published data and monetary policy . Since we are not yet free to trade the Chinese currency (RMB), this strategy has worked very well for us.
The Siamese Twins method is applied on a daily chart (D1), meaning that each candle on the chart represents a day's worth of price movement.
This strategy is only available for AUD/USD.
The Australian dollar tends to strengthen when Chinese data releases are positive, such as higher GDP and PMI, for two reasons.
1. China will import more raw materials from Australia. Due to the increase in trade, China will use more Australian dollars to pay for these raw materials, which will cause the appreciation of the Australian dollar.
2. The data released by China is more satisfactory, which tends to increase speculation on high-yielding currencies. This is because to a large extent, China is regarded as one of the major players in the world, and these positive data from China will also have a ripple effect on the world economy. This positive impact on the global economy has encouraged risk-on sentiment among traders, which in turn has strengthened the Australian dollar, which has the highest interest rate among G20 currencies.
Go long AUD/USD immediately after China releases better than expected data. Likewise, China shorted AUD/USD immediately after the release of worse-than-expected data.
I call this strategy the Siamese twins strategy because China's economy and Australia's economy are closely linked. When China's economy is doing well, Australia's is doing well, and vice versa.
Below are the steps to go long with the Siamese Twins strategy.
1. Find the main news in China. On November 30th, 2010, we saw China lower bank reserve ratios for the first time in 3 years, equating to freeing up more cash to encourage bank lending. Because this measure will stimulate the growth of China's economy, the impact is positive.
2. Go long AUD/USD immediately.
3. Set the stop loss below the previous low.
4. This transaction has two profit targets, which are set according to the risk-reward ratio of 1:1 and 1:2 respectively.
The risk on this trade is 400 pips and the payoff is 800 pips if both profit targets are met. The risk reward ratio is 1:2, if we take 3% risk, the return is as high as 6%.
From the example of a long trade, we can see that:
Entry position=1.0000
Stop loss=0.9600
Profit target 1=1.0400
Profit target 2=1.0800
Below are the steps to execute the short conjoined twins strategy.
1. Find the main news in China. Let's see, in this example, the HSBC Manufacturing PMI for China was worse than expected. The impact of this data is negative and is considered to indicate a contraction in the Chinese economy.
2. Short AUD/USD immediately.
3. Set the stop loss above the previous high.
4. This transaction has two profit targets, which are set according to the risk-reward ratio of 1:1 and 1:2 respectively.
From the example of a short transaction, we can see:
Entry position=1.0458
Stop loss=1.0638
Profit target 1=1.0278
Profit target 2=1.0098
The risk on this trade is 180 points, and the reward is 360 points if both profit targets are met. The risk reward ratio is 1:2, if we take 3% risk, the return is as high as 6%.
Because the Siamese twins strategy uses long-term time frames, this strategy is quite suitable for long-term traders. The aftermath of Chinese announcements - good or bad - could take weeks, if not months, to play out in Australia's economy.
As we learned in the trend-following swap strategy, being long AUD/USD can also bring you additional swap interest income. If the position can be held for a few months before the transaction closes, then the number of gains is also very impressive.
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