A correlation is a unitless measurement alongside a mathematical reading from +1 to -1. Unitless means Correlation numbers flow through prices and change based on the level of prices. The answer to a particular Correlation between and among currency pairs is which currency pairs hold a positive association and which pairs are negative.
The Correlation measurement is an evaluation of prices between and among currency pairs but more specifically, its an assessment to moving averages as moving averages are the driving force behind currency price movements.
A positive Correlation relationship informs prices and moving averages are correctly aligned while a negative alliance informs problems exist among counterpart prices and averages. The price level maybe to high or to low in relations to partner currencies.
The final determination then assesses not only multiple trades but which pairs are problems in relation to counterpart currencies. Troubled pairs without acceptable Correlations are un tradeable and must be excluded from trade consideration.
Correlations further examines not only overall normal and non normal currency market prices but a problem may exist within a group of currencies such as EUR/USD and its cross pairs.
Correct is EUR/USD must correlate to all cross pairs to determine a normal functioning group. Likewise to GBP/USD and cross pairs, AUD/USD and cross pairs, NZD/USD and cross pairs.
USD/CAD Vs USD/CHF +96%
USD/CAD Vs USD/JPY +92%
USD/CHF Vs USD/JPY +98%.
USD currency pairs are not only running strong and perfect but multiple trades exist.
GBP/NZD is a deeply toubled pair between and among counterpart currency pairs as follows:
GBP/NZD Vs GBP/USD +29%. Low.
GBP/USD Vs NZD/USD +82%.
GBP/NZD Vs NZD/USD -29%.
GBP/NZD barely reveals a pulse to current prices and averages and to main counterparts which means GBP/NZD prices are to high or low in relation to GBP/USD and NZD/USD because of the positive correlation between NZD/USD and GBP/USD.
GBP/NZD Vs EUR/NZD
GBP/NZD Vs EUR/NZD +53%.
Both are considered the same currency pair and both conceivably supposed to move together in tandem but its not true.
GBP/NZD Vs USD
Here's the question: If GBP/NZD lacks a correlation to main counterparts then does GBP/NZD transform and trade as a USD pair is an incorrect statement. GBP/NZD belongs in the GBP/USD universe and must correlate to GBP/USD but at certain instances, GBP/NZD will correlate to NZD/USD. Here's proof to the USD statement.
GBP/NZD Vs USD/CAD -19%
GBP/NZD Vs USD/CHF -4%
GBP/NZD Vs USD/JPY +2%.
Can GBP/NZD ever transform and trade exactly as USD by correlations is not true at this current evaluation. We can check, assess and prove this statement by AUD/NZD and EUR/NZD.
AUD/NZD V USD
AUD/NZD Vs USD/CAD -94%
AUD/NZD Vs USD/JPY -97%
AUD/NZD Vs USD/CHF -97%
EUR/NZD Vs USD
EUR/NZD Vs USD/CAD -84%
EUR/NZD Vs USD/JPY -81%
EUR/NZD Vs USD/CHF +62%
Current EUR/NZD to EUR/USD correlates 83% and EUR/NZD correlates 62% to USD/CHF. This situation is a severe problem and explains why EUR/NZD and GBP/NZD as the same pair only correlates +55%. Both should correlate at least +80% to +90%.
GBP/NZD Vs AUD/NZD
GBP/NZD Vs AUD/NZD +0.09 %.
GBP/NZD Vs EUR/NZD and AUD/NZD
GBP/NZD fails to not only correlate to GBP/USD and NZD/USD but GBP/NZD fails to correlate within its group Vs EUR/NZD and AUD/NZD. Clearly a troubled currency pair.
EUR/NZD The Better Trade by Correlations
EUR/NZD Vs EUR/USD +83%
EUR/NZD Vs NZD/USD +55%
EUR/USD Vs NZD/USD +55%
EUR/NZD strong positive correlation to EUR/USD reveals EUR/NZD will move alongside EUR/USD but also EUR/NZD operates correctly within the EUR/USD set of cross pairs. The problem comes when EUR/NZD correlates +62% to USD/CHF. This situation leaves EUR/NZD paralyzed and possible to trade erratic prices.
GBP/NZD Vs EUR/NZD
GBP/NZD shortest term is slightly overbought but deeply oversold just past its 10 year average. EUR/NZD is overbought shortest term and overbought past its 10 year average.
AUD/NZD Correct Correlations
AUD/USD Vs NZD/USD +96%
AUD/NZD Vs NZD/USD +85%
AUD/NZD Vs AUD/USD +96%
AUD/NZD Vs EUR/NZD +87%
AUD/USD correlates to NZD/USD and vice versa due to underlying RBA interest rates.
AUD/USD Vs RBA Interest Rates
AUD/USD Vs Interest Rates +96%
NZD/USD Vs RBNZ Interest Rates
Here's where markets get interesting as the RBNZ just lowered interest rates and a drop was seen from 0.20 to 0.06 upon the RBNZ statement. Correlations are off and negative which means the NZD/USD price must align to its current interest rates. We're 2 days into the drop and interest rates remain negative to NZD/USD. Normally its a 5 day process to align interest to exchange rates.
NZD/USD Vs RBNZ interest rates -83%
NZD/USD Vs NZD/JPY +96%
NZD/USD Vs NZD/CAD +67%
NZD/USD Vs NZD/CHF -28%.
NZD/USD correlates and moves together vs NZD/JPY and NZD/CAD but lacks a correlation to NZD/CHF which means a big price adjustment wil be seen to NZD/CHF. Yet all NZD must adjust to its new interest rate.
CHF Correlation as Problem
GBP/USD Vs GBP/CHF -98^
NZD/USD Vs NZD/CHF -28%
AUD/USD Vs AUD/CHF +91%
EUR/USD Vs EUR/CHF =98%
USD/CAD Vs CAD/CHF +78%
Troubled pairs are GBP/CHF and NZD/CHF as both bolted from the GBP and NZD universe.
USD/CHF Vs GBP/CHF +67%
USD/CHF Vs NZD/CHF +64%
GBP/CHF amd NZD/CHF moves together with USD/CHF.
Overall Currency Markets
GBP/USD Vs USD/CAD -98% and healthy
Related read: Currency Pairs and Their Indexes
Hello traders! One of the more interesting and helpful tools we have as traders is to use the correlation of the dollar index ($DXY) with our US dollar currency pairs. However, since non USD currencies don’t have their own index, we’ll have to make one. Let’s dive in! Keep reading
Trading currencies and other financial instruments carries a degree of loss and possible loss of entire investments. Please managed your own risks, stop loss, and margins requirements.