One of the most popular forex education articles that we have ever published is on the topic of correlations. As the world changes, so does the correlation between different currencies and different instruments. We want to take the opportunity to provide the latest correlation figures and to outline the top three correlations for each currency pair on a one- and 12-month basis.
The stronger the correlation, the more likely the instruments will move in tandem, which in some cases means that you are doubling up on a position. The weaker the correlation between different currency pairs or instruments, the more diversification it provides to your portfolio. For example, over the past month, if you were long the EUR/USD and short USD/CHF, you basically had two opposing trades that moved against each other 99% of the time, resulting in little profits.
Meanwhile the 93% negative correlation between the VIX and the S&P 500 over the past month suggests that stocks are particularly sensitive to volatility and the reason why they are up is because volatility is low. These correlations can and will change with time, but to be an effective trader, it is extremely important to understand how different currency pairs move in relation to each other to better understand your exposure and manage risk.
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Here is the detailed breakdown of correlations for our more data-savvy traders. We have tabulated the one-month, three-month, six-month, and 12-month absolute correlations between different currency pairs. Some traders also like to look at correlation on a 20-period average basis because the data is smoother and the numbers can be more reliable, so we have provided this table at the very end.
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By Kathy Lien of GFTForex.com
