Currency Correlations

Positive correlation between the EUR-USD and GBP-USD as usual moving this pair identically the same direction. Therefore where ever the one or the other goes it will eventually follow one another.

However there are certain time of the cycle where one or the other will take turn to leads. For example previous week the EUR-USD was in front where as currently GBP-USD is leading. This because of both are closely correlated to the EUR-GBP pair. As a result whenever the EUR-GBP going up making the EUR is stronger than Pound therefore the EUR-USD will leads over GBP-USD. On the other hands when the EUR-GBP is going down the Pound sterling is stronger than EURO therefore the GBP-USD will move ahead of the EUR-USD pair.

This is also affect the GBP-JPY and EUR-JPY the same way. The only difference is that both of this pair is correlated with USD-JPY which also provide great effect on them. It can be seen in the current trading trend, despite of the upward movement for GBP-USD and EUR-USD pairs, GBP-JPY and EUR-JPY are heading downwards following USD-JPY movement. There are other times where GBP-JPY and EUR-JPY will move identically with the GBP-USD and EUR-USD.

So my point is that, the correlation between currency pairs are relatively dynamic. You may not know when will it move in the same direction or opposites, because it changes over time. It is therefore because of inter-correlation of the currency pairs among one another in the currency market,making it unpredictable in short-term trading. However in certain degree of certainty most they are actually have limited correlation boundary therefore overall there are predictable.

Check This Site to learn more about currency correlation and how you can make use of it to apply it on the hedging technigue.





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