When major currency pairs are put side by side, there appears to be a relationship between them. In today’s posting, we will discuss their possible ‘correlation’.
Correlation of Currencies is about describing the relationship of 2 or more currencies. A positive correlation will mean that if Currency A is rising, then Currency B is likely to rise. A negative correlation will mean that Currency A is rising but Currency B is falling.
Attached below is an example of Positive Correlation between EUR/USD and GBP/USD.
Positive Correlation between EURUSD & GBPUSD
Notice when EUR/USD is rising, GBP/USD is also rising, and when EUR/USD is falling, so is GBP/USD.
Attached below is an example of negative correlation between EUR/USD and USD/CHF.
Negative Correlation of EUR/USD and USD/CHF
Attached charts are from FX Accucharts from CityIndexAsia
As mentioned, currency correlation has 2 forms: Positive and Negative Correlation. There is something of interest for traders to understand, e.g: for a Positive Correlation, if Currency A has moved, how much should we expect Currency B to move?
Next week, we shall go into some details about Currency Correlation and its Correlation Factor; and what will be considered as a good correlated pair for trading.
