Update on Forex Inter-Market Correlations
As the third quarter comes to a close, it’s necessary for us to update our correlations for each currency pair that we trade. This is a integral part of how we manage each investors portfolio to balance the account’s exposure. Utilizing correlations to trade the forex is a complicated trading strategy and correlations can and do break down over time. For our analysis here, we will only examine the major currencies that we trade.
Currency Cross Correlations: (all correlations calculated with a three month time frame) To eliminate redundancies we have only done one currency cross correlation analysis. (ie: the correlation between EUR/USD vs GBP/USD and GBP/USD vs EUR/USD is the same.)
EURO Crosses
EUR/USD vs USD/CHF- Correlation is -.83. This is a little weaker then expected, but they still have a strong negative correlation. This correlation is the most easiest for new traders to pick up on due to its consistency.
EUR/USD vs GBP/USD – Correlation is +.91. Out of all the major currency pairs, this is the strongest correlation for EUR/USD. This a stronger correlation then we expected.
EUR/USD vs AUD/USD – Correlation is +.85
EUR/USD vs NZD/USD – Correlation is +.86
EUR/USD vs USD/CAD – Correlation is -.42
EUR/USD vs USD/JPY – Correlation is -.77
AUD Crosses
AUD/USD vs USD/CHF – Correlation is -.86
AUD/USD vs USD/CAD – Correlation is -.57. This is a little weaker then expected, but still shows that as AUD/USD goes up, USD/CAD has a high probability that it will go down.
AUD/USD vs NZD/USD – Correlation is +.91. This is the strongest correlation for AUD/USD out of all the other major pairs. This strong correlation does fall under our expectations, and probably the second easiest correlation for new traders to pick up on.
AUD/USD vs GBP/USD – Correlation is +.84
AUD/USD vs USD/JPY – Correlation is -.80
CHF Crosses
USD/CHF vs NZD/USD – Correlation is -.81
USD/CHF vs USD/CAD – Correlation is +.22
USD/CHF vs GBP/USD – Correlation is -.88
USD/CHF vs USD/JPY – Correlations is +.93. This has surprised us greatly given that historically these two currency crosses do not have a strong correlation. This correlation is the strongest for the CHF and JPY crosses.
CAD Crosses
USD/CAD vs USD/JPY – Correlation is +.07, we were surprised to find that this comparison has the lowest correlation of all the pairs.
USD/CAD vs GBP/USD – Correlation is -.38
USD/CAD vs NZD/USD – Correlation is -.68
JPY Crosses
USD/JPY vs GBP/USD – Correlation is -.85
USD/JPY vs NZD/USD – Correlation is -.68
NZD Crosses
NZD/USD vs GBP/USD – Correlation is +.84