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The Strongest Forex Correlations

Last updated 11/27/2009 9:46 AM ET (GMT -5) 9 Comments

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Kathy Lien

Director of Currency Research, GFT

One of the most popular forex education articles that we have ever published is on the topic of correlations.  As the world changes, so does the correlations between different currencies and different instruments.  We want to take the opportunity to provide the latest correlation figures and to outline the top 3 correlations for each currency pair on a 1 month and 12 month basis. The stronger the correlation, the more likely the instruments will move in tandem, which in some cases means that you are doubling up on a position.  The weaker the correlation between different currency pairs or instruments, the more diversification it provides to your portfolio. For example, over the past month if you were long the EUR/USD and short USD/CHF, you basically had 2 opposing trades that moved against each other 99 percent of the time, resulting in little profits.  Meanwhile the 93 percent 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 are up is because volatility is low.  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 1 month, 3 month, 6 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.  Enjoy!

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Comments (9)

Paul Barney

November 27, 2009 at 10:32 AM ET

Thank you, K.

Doobp

November 27, 2009 at 11:03 AM ET

cool.. thanks...

Demax

November 27, 2009 at 11:04 AM ET

Likewise, Thank you Kathy.

fuji

November 27, 2009 at 01:20 PM ET

excellent resources, Thank you very much. Do you think the Dubai News will bring in more violatility to the Risk assets. and the impact to the Market is going to be as big as the Lehman impact.

Mike

November 27, 2009 at 03:03 PM ET

cool thx

rsm

November 27, 2009 at 06:21 PM ET

Excellent Kathy. If I may, a quick comment on "the 93 percent 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 are up is because volatility is low.":

Correlation does not imply causality. Correlation is very useful for diversification, as you state as well in other words. Stocks are not up *because* volatility is low, this cannot be derived from a correlation measure. Also, the VIX does not really volatility lately, it is a measure of bearishness.When stocks drop, the VIX rises, but when stocks go up, the VIX declines, hence the negative correlation.

For correlations among all currency ETFs, there is a very useful chart here: http://2.bp.blogspot.com/_iV5yDiKxCdk/Suxa348wgVI/AAAAAAAACmQ/NsjcakUP7OU/s1600-h/currencies-sepoct09.jpg

Thank you.

klien

November 30, 2009 at 02:29 PM ET

You are absolutely right rsm which is why traders have to be careful with over interpreting the correlation data

Justin

November 30, 2009 at 01:50 PM ET

Excellent stuff, thanks!

Fedecosta

December 05, 2009 at 02:38 PM ET

This is a very interesting work, but you missed the USD against all others... :(

Can you implement the job, pls?

Thank you in advance.

Federico.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.