The Strongest Forex Correlations This Year
02/23/2010 12:01 am EST
As the world changes, so do the correlations between different currencies and different instruments. Therefore, we take this opportunity to update one of the most popular forex education articles that we have ever published on the topic of correlations.
In this article, we have provided the latest correlation number and outlined the top three correlations for each currency pair on a one-month and 12-month basis. The stronger the correlation, the more likely the instruments will move in tandem, which means that if you are long both instruments, for example, you are basically doubling up on a position. The weaker the correlation between different currency pairs or instruments, the more diversification it can provide 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 nearly 100% of the time, thus resulting in little profits.
Meanwhile, the 85% 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 recovered last week is because volatility has fallen sharply. 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.
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 as well. Enjoy!
By Kathy Lien of GFTForex.com