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