How to Read Currency Correlation Tables?

Currency Correlation: The Key to More Accurate Forex Predictions

Have you ever noticed that when one currency pair rises, another one might fall? Or that two pairs move in the same direction, almost mirroring each other?

If your answer is yes, then you've already encountered currency correlation.

Currency correlations are not just random market coincidences. They represent a statistical relationship between currency pairs, allowing traders to better understand market dynamics, identify additional trading opportunities, and avoid excessive risks.

Before diving into correlation tables, let's first explore why understanding currency correlations is so important for successful Forex trading.

---

What is Currency Correlation?

Currency correlation is the relationship between the price movements of two currency pairs. It indicates whether these pairs tend to:

• Move in the same direction
• Move in opposite directions
• Move independently of each other

This relationship is measured using correlation coefficients, which range from -1.00 to +1.00.

• +1.00 correlation – A perfect positive correlation, meaning two currency pairs will move in the same direction 100% of the time.
• -1.00 correlation – A perfect negative correlation, meaning the pairs will move in opposite directions 100% of the time.
• 0 correlation – No relationship between the pairs. Their price movements are completely independent.

---

Why Are Currency Correlations Important?

1. More Effective Risk Management

Correlations help traders avoid unnecessary risk exposure by opening multiple positions that could result in double risk. For example, if EUR/USD and GBP/USD have a strong correlation, opening trades on both might amplify potential losses.

2. Hedging Opportunities

Understanding correlations allows traders to hedge their trades by opening opposite positions in negatively correlated pairs. For instance, since EUR/USD and USD/CHF have a strong negative correlation, going long on EUR/USD while shorting USD/CHF can reduce overall risk.

3. Identifying the Strongest and Weakest Currencies

By analyzing correlations, traders can determine which currencies are strengthening or weakening. If EUR/USD is rising while USD/JPY is falling, it could indicate overall USD weakness, which presents trading opportunities in other currency pairs.

4. Optimizing a Trading Portfolio

Being aware of correlations helps traders diversify their portfolio and avoid excessive risk concentration.

---

How to Read Currency Correlation Tables?

Each table presents the correlation between one currency pair and several others over different time periods.

• Values close to +1.00 (e.g., 0.98) indicate a strong positive correlation, meaning the pairs are likely to move in the same direction.
• Values close to -1.00 (e.g., -0.98) indicate a strong negative correlation, meaning the pairs are likely to move in opposite directions.
• Values near 0 (e.g., 0.07) indicate no significant relationship between the pairs.

---

Breakdown of Currency Correlation Tables

EUR/USD Correlations

EUR/USD shows a strong negative correlation with USD/CHF across all timeframes (-0.85 to -1.00). This means that when EUR/USD rises, USD/CHF is likely to fall.

EUR/USD also has a strong positive correlation with GBP/USD (0.88) and AUD/USD (0.95) over the long term. This means that if EUR/USD is moving up, GBP/USD and AUD/USD are also likely to rise.

USD/JPY Correlations

USD/JPY generally has a negative correlation with EUR/USD and GBP/USD. For instance, the 1-year correlation between EUR/USD and USD/JPY is -0.69, meaning that when EUR/USD goes up, USD/JPY usually moves down.

Interestingly, USD/JPY shows some positive correlation with USD/CHF, especially in shorter timeframes.

GBP/USD Correlations

GBP/USD strongly correlates with EUR/USD (0.94 on a weekly basis and 0.88 over a year), meaning that both pairs tend to move in the same direction.

However, the correlation between GBP/USD and USD/JPY varies depending on the timeframe. Short-term correlation may be weak, but long-term correlation is stronger.

USD/CHF Correlations

USD/CHF consistently exhibits a strong negative correlation with EUR/USD. This is because the Swiss franc often acts as a safe-haven currency, especially in times of market uncertainty.

AUD/USD and NZD/USD Correlations

These two pairs have a very strong positive correlation (+0.98 in the long term). This makes sense since both currencies belong to commodity-driven economies and often move in tandem.

NZD/USD also has a strong positive correlation with EUR/USD (0.96). This suggests that when the euro strengthens, the New Zealand dollar is also likely to appreciate.

---

How to Use Currency Correlations in Trading?

1. Avoid Overexposure to Risk

If you go long on both EUR/USD and GBP/USD, be aware that their correlation is 0.88, meaning if EUR/USD drops, GBP/USD is also likely to decline.

2. Hedge Your Trades

If you open a long position on EUR/USD, you could hedge it with a short position on USD/CHF, since they have a -0.98 correlation. This can help mitigate potential losses.

3. Evaluate Global Market Trends

If USD/JPY and USD/CHF are both rising, it could indicate broad USD strength, impacting multiple currency pairs.

4. Confirm Trading Signals

If technical analysis signals a buy on AUD/USD, check whether this is supported by EUR/USD rising or USD/CAD falling.

---

Conclusion

Currency correlations are a powerful tool that can significantly improve trading performance. Understanding these relationships helps traders to:

✅ Reduce risk exposure
✅ Optimize portfolio diversification
✅ Improve trading accuracy
✅ Identify new opportunities

 

When used correctly, currency correlations can become a secret weapon for professional traders! 🚀