Correlation of variables
A statistical measure referring to the extent of linear relationship between two or more variables, in other words, of the degree to which the movements of two currency pairs are related. For example, if two currency pairs have a high correlation, their prices tend to rise and fall in sync. Although the measure suggests some causal relationship between the variables, the relationships between pairs and the correlation values tend to change from time to time.
The standard measure of correlation is the correlation coefficient, a number between -1 and 1 that indicates the strength and direction of a the linear relationship. A correlation coefficient of -1 indicates that the currency pairs are perfectly negatively correlated, that is, a higher value for one pair tends to correspond to a lower value for the other. A correlation coefficient of 1 means that they are perfectly correlated, indicating a higher value for one variable tends to correspond to a higher value for the other. The weaker the relationship, the closer the correlation coefficient is to 0.
The chart to the left is a comparative study of major foreign currency pairs, some of them inverted to their reciprocals (for example CAD/USD instead of USD/CAD), allowing a quick glance of recent performance of some of the major currencies against the US Dollar.
Scroll the chart to fix the zero percent point to the moment you wish (the start of the week, the start of the day or the current market session).
Feel free to build you own comparative charts using the interactive charting tool.
Latest Correlation Analysis and News
Knowing how closely correlated the currency pairs are in your portfolio is a great way to measure your exposure and risk. You might think that you're diversifying your portfolio by investing in different pairs, but many of them have a tendency to move in the same or opposite direction to one another. The correlations between pairs can be strong or weak and last for weeks, months, or even years. [...] Any correlation calculation will be in decimal form; the closer the number is to 1, the stronger the connection between the two currencies.
[...] Just as on the positive side, the closer the number is to -1, the more connected the two currencies movements are, this time in the opposite direction.
[...] the most important aspect to remember when analysing currency correlations is that they can also easily change over time.
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Correlations and Inter-Market Analysis
...this opposite relationship between the DOW and USD did not always exist. In the years past under high interest rates, stock prices and the USD did enjoy a positive correlation as foreign investment capital that finds its way into US businesses, US stocks, and ultimately the USD.
Market participants can use the combination of signals in the bond-, commodities- and stock markets to recognise which part of the economic cycle the market is in and which asset categories should be over- or underweighted. Above all, Intermarket analysis helps to achieve a better overall understanding of the financial markets in general.
You can use correlations to help with risk by making sure you aren’t accidently doubling up on one side of a currency trade. Use the correlations to help confirm if a breakout is real or not, and also help to manage your winning trades.