Hey all,
From time to time I check out currency pair correlations on Mataf.net (
http://www.mataf.net/en/analysis-correlation.htm). I do this for three main reasons:
1) To make sure I am not taking on any additional correlative risk with my currency portfolio (e.g. trading two pairs that are highly correlated).
2) To make sure I am not hedging my positions unknowingly (e.g. by trading two pairs that are highly inversely-correlated)
3) To see what other pairs I may need to keep an eye on as a final confirmation of sentiment for my principally-traded pairs
If you are not doing so already, I recommend checking out this site and using the correlation information in your analysis and trading decisions. Since we have been discussing money and risk management quite a bit lately, I thought a new post on this was apropos.
Here is some interesting currency correlation trivia for you to whet your appetite...
1) Did you know that the most highly positively correlated pair to
EUR/JPY is the Cable (GBP/USD)? The one pair you would
think would be more highly correlated, EUR/USD, is roughly 10% LESS positively correlated!
2) What is the one currency pair that consistently maintains a
100% negative correlation with EUR/USD? The USD/DKK (Danish Krone). Why? Denmark negotiated special "opt-outs" of the Maastricht Treaty that allowed the country to preserve the krone while the majority of the European Union adopted the euro in 1999. The Krone is essentially "pegged" to the Euro, however, which is why the inverse relationship exists between the two currencies.
Currency correlations will vary between pairs based on the number of days you calculate them for. So if you are looking at a swing trade, consult the 5-day correlation chart rather than the 5-hour chart as that will give you a more accurate correlation for the time frame in question.
Best,
Ian
