Following up with my previous post on Demystify the Correlation of Currencies.

We mentioned about Positive and Negative Correlation, and now we look into what is correlation coefficient.

Correlation coefficient for Currencies is a number to describe the closeness of the correlation for any two currency pairs. It is usually in the range between +1 and -1, where +1 is to say that A and B are positively correlated and moves in the same magnitude and vice-versa. In general, a good positive correlation pair will have a correlation coefficient of 0.8 to 1 and a negative correlation pair is between -0.8 to -1.

There are 2 websites which has sampling data for most of the major currencies: Mataf.net and OANDA.

We shall have a look at a typical correlation table shown below.

FX Correlation Table

Currency Correlation Table sample, courtesy of OANDA

As observed, the EUR/USD pair has strong negative correlation with USD/CHF and USD/CAD and positive correlation with AUD/USD, GBP/USD, NZD/USD, XAU/USD (Gold) and XAG/USD (Silver).

Attached a chart of EUR/USD with USD/CHF on the same chart.

FX Correlation of EUR/USD and USD/CHF

FX AccuCharts, courtesy from CityIndex Asia

Noticed that when EUR/USD is declining, USD/CHF is climbing. Likewise, a bottoming of EUR/USD coincides with a topping of USD/CHF.

Thus, with a proper analysis of the currencies all at one screen, it can be very profitable trading on multiple currencies that are highly correlated to each other.