CORRELATED Currency Pairs

CORRELATED PAIRS - HOW CORRELATED ARE THEY TO ONE ANOTHER?

This article is about currency pairs that are correlated to one another, in particular, the major pairs. I seldom trade cross pairs. I trade major pairs most often. Therefore I have made a lot of observations on major pairs instead of cross pairs. 

Correlated pairs are currency pairs that move synchronously or simultaneously for most of the time. In othe words, the movements are in tandem. The movements can be either in the same direction or in the opposite direction.

There are 7 major pairs in forex market, namely AUDUSD, EURUSD, GBPUSD, NZDUSD, USDCAD, USDCHF, and USDJPY. From these 7 pairs, some are correlated to one another. From my observations, these pairs below are correlated to each other:

EURUSD and GBPUSD

These two pairs move in the same direction. When EURUSD is bullish, GBPUSD is expected to be bullish as well; and vice versa. However, the correlation is sometimes interrupted by fundamental news that affect either one pair. For example, when news about the UK unemployment rate is released, GBPUSD usually moves dramatically while EURUSD only moves a little bit. Therefore, their correlated strength is not the strongest as it is often interrupted by economic news.

AUDUSD and EURUSD

These two pairs also move in the same direction. AUDUSD has a unique characteristic as it is one of the currency pairs that is actively traded during Asian market due to the geological fact that Australia is located in the Asian hemisphere, and thus it shares the same time zones with most of Asian countries. Most of currency pairs remain static, but AUDUSD can move significantly during Asian market due to this geological factor, as Australian economic news is often released during the Asian trading session. Therefore, these two pairs do not have a very strong correlation. Another note that you must remember is that even when these two moves together in tandem, the movement of EURUSD is much more volatile than AUDUSD. By this I mean that while EURUSD can move for 100 pips at a particular moment, AUDUSD may only be able to move for 50 pips.

AUDUSD and NZDUSD

These two pairs almost have perfect correlation, because both Australia and New Zealand are in the same hemisphere. Both pairs are active during Asian market. Under a normal condition when no important news is available, these two pairs really move perfectly in tandem. They move in the same direction. However, when news that affects one pair is released, once again, the correlation may be interrupted. New Zealand often has economic news very early in the morning (at about 5 to 6 am GMT+8), which is earlier than Australian economic news. Thus, NZDUSD often has a significant movement very early in the morning when the AUDUSD is still flat.

EURUSD and USDCHF

This is the best correlated pairs, although they are not perfectly correlated (there is no perfection in the world - only GOD is perfect). Both Euro and Swiss Franc are currencies that are used in Europe. Both pairs move in the opposite direction, i.e. when EURUSD is up, USDCHF is down; and vice versa. When fundamental news which affect the Euro is announced, EURUSD can have a big movement and so can USDCHF (although the news is supposedly affect Euro, not Swiss Franc). However, you must bear in mind that EURUSD's movement is stronger than USDCHF. This means when EURUSD swings 100 pips, USDCHF follows to do so for, let us say, 50 pips.

To conclude this article, I would like to say that the best correlated pairs are EURUSD - USDCHF, followed by AUDUSD - NZDUSD. Let me remind you again, there is no perfection in the world. Although EURUSD - USDCHF is the best correlated pair, there may be a time when one pair makes a huge move while the other does not move significantly. Last but not least, correlation strengths do change from time to time.