When it comes to trading forex, some currency pairs move in predictable ways with other pairs. This is the forex correlation coefficient. And the pairs may also be positively or negatively aligned to other pairs. Knowing how currency pair correlation works and how you can use fx correlation to make more informed trades.
Currency pair correlation is the measure to which the movement of currency pairs in forex are related to each other. But currency pair correlation can also describe how forex pairs and markets such as stocks and commodities are linked too. Any relationship between the price of one currency pair with another. Or with other markets, can help traders make sense of forex movements and assist them in their decision making.
The correlation coefficient is a measure that represents how strongly or weakly two currency pairs are aligned over a certain time period. It is expressed in values from -1.00 to 1.00, with -1.00 representing the weakest correlation and 1.00 the strongest. For example, if a pair has a currency coefficient of 0.9, that is a strongly correlated pair, while a coefficient of -0.9 will be weakly correlated.
To illustrate, here is a correlation coefficient table for EUR/USD, showing how this major pair relates to three other major currency pairs over various time periods. Notice how GBP/USD shows a positive correlation, but the currencies generally recognized as ‘risk off’ – the Swiss Franc and the Japanese Yen – in this example show a negative one.
The key currency pairs that are correlated in the strongest way include pairs such as EUR/USD and GBP/USD, as can be seen above. They often move together due to the economic relationships between the areas they represent.
In this case, GBP and EUR have close ties based on the eurozone and the UK sharing geographical proximity, as well as backup reserve currency status. Also, the fact that both these pairs share the USD as a counter currency mean that any change in the dollar is reflected in both currency pairs simultaneously. See below how the price lines tend to move in similar ways to one another.
Other pairs that tend to show a strong correlation are EUR/USD and AUD/USD and EUR/USD and NZD/USD.
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