The Strongest Forex Correlations 2010
As the world changes, so do the correlations between different currencies and different instruments. It is a quiet morning in the forex markets with no U.S. or European data on the calendar. The dollar is trading slightly lower against most of the major currencies but the weakness is extremely nominal. Therefore we take this opportunity to update one of the most popular forex education articles that we have ever published is on the topic of correlations.
In this article, we have provided the latest correlation number and outlined 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 means that if you are long both instruments for example, you are basically doubling up on a position. The weaker the correlation between different currency pairs or instruments, the more diversification it can provide to your portfolio. For example, over the past month if you were long the and long you basically had 2 opposing trades that moved against each other nearly 100 percent of the time, resulting in little profits. Meanwhile the 85 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 recovered last week is because of volatility has fallen sharply. 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!