Correlated Forex Pairs List

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It’s a great idea to determine which currency pairs correlate with learning how you can benefit from the markets. Meanwhile, you will learn more about Forex trading by knowing the correlated Forex pairs list. A currency correlation in Forex results from an exchange rate relationship between different currency pairs.

When two pairs of currencies move in tandem, there is a positive correlation. When there is a negative correlation between two Forex pairs, they will move against each other. By leveraging correlations, you can gain more significant profits, which can be used to hedge your Forex positions and reduce your risk exposure.

When you are confident that one pair of currency will go in tandem with another or opposite to another, you may choose to unlock another position to increase your profit.

Currency correlations in Forex trading

currency exchange rate on digital LED display board

Currency correlations or Forex correlations are a way for SA traders to determine whether one currency pair/ Forex pair will move similarly to another currency pair. For example, if two currency pairs go up simultaneously or down simultaneously, this is believed to be a positive correlation.

Alternatively, when one currency pair moves against another – that is, when one rises and the other falls – it is called a negative correlation. Therefore, the correlation between currencies should be monitored and understood when analysing any commodity, stock, or instrument, not just when analysing the price.

This article examines the relationship between Forex currency correlations and how it affects trades. We will calculate it using Excel and examine how it affects trades.

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What do correlated Forex pairs mean?

The movement of currency pairs is correlated when they are dependent on one another. For example, currency pairs can be correlated when the currencies belong to the same economy or have the same currency.

The EUR/USD and the GBP/USD pair have USD as a common factor. Further, the Eurozone and Great Britain are closely linked economies that trade. The correlated currency pairs are due to these factors.

Whenever the USD is on the quote side of the exchange rate, most USD currency pairs move in the same direction. So, for instance, you can also find AUD/USD and NZD/USD as correlated Forex pairs.

Some Forex pairs with a strong correlation tend to have a weaker relationship. In comparison, others will have a stronger relationship because each currency represents a separate economy and sells various goods and services, affecting the exchange rate differently!

Highly correlated currency pairs

Which Forex pairs have the highest correlation? That is a question that a lot of people ask. Currency pairs with highly correlated economic ties almost always represent close economic ties.

Since the British Pound and the Euro are achieving a closer relationship, there is frequently a positive correlation between GBP/USD & EUR/USD. This is because they are also geographically close or far, and they are both the most-coveted and highly regarded reserve currencies worldwide.

Correlation tables between Forex pairs provide examples of correlations between highly traded currencies worldwide. Forex currency pair correlations are shown below after a month’s correlation calculations. We used Pearson correlation coefficients in this calculation.

EUR/USD GBP/USD USD/CHF USD/JPY EUR/JPY USD/CAD AUD/USD
EUR/USD 1 0.83 -0.54 -0.09 0.79 -0.68 0.48
GBP/USD 0.83 1 -0.39 -0.05 0.66 -0.66 0.53
USD/CHF -0.54 -0.39 1 0.48 -0.17 0.20 -0.09
USD/JPY -0.09 -0.05 0.48 1 0.52 -0.11 0.15
EUR/JPY 0.79 0.66 -0.17 0.52 1 -0.65 0.5
USD/CAD -0.68 -0.66 0.20 -0.11 -0.65 1 -0.73
AUD/USD 0.48 0.53 -0.09 0.15 0.5 -0.73 1

Correlations do change

Therefore, it is evident that correlations do change, which makes observing correlation shifts even more critical. Factors such as sentiment and global economics can frequently change daily. Today, a strong correlation between two currency pairs might not indicate the longer-term relationship between the two.

Thus, it is essential to examine the six-month trailing correlation. The relationship between the two currency pairs is shown in a six-month moving average, typically more accurate. The cause of changes in correlations can be attributed to diverging monetary policies, the sensitivity of certain currencies to commodity prices, or unique economic or political factors.

Calculating correlations yourself

By calculating your correlation pairings, you’ll be able to keep up with their direction and strength. In addition, the software allows you to easily calculate correlations for a variety of inputs.

Use a spreadsheet program like Microsoft Excel to calculate a simple correlation. For example, you can download historical daily currency prices (even some free ones) from charting packages, which you can then enter into Excel.

Using Excel, type =CORREL(range 1, 2) and see the correlation. The 1-year, 6-month, 3-month, and one-month trailing readings provide the most comprehensive view of changes in correlation over time. First, however, you decide how many or which of these readings you wish to analyse.

Here is a step-by-step overview of correlation calculation

For example, obtain the pricing data for the GBP/USD and the USD/JPY currency pairs.

  • Label each of these pairs in two columns. Then, complete the columns with the past daily prices that occurred over the period you are analysing for each pair.
  • At the bottom of one column, type =CORREL( into an empty slot.
  • You should get a range in the formula box if you highlight all the data in one of the pricing columns.
  • Enter a comma to indicate a new cell.
  • Repeat steps 3-5 for the other currency.
  • Closing the formula will look like =CORREL(A1:A50, B1:B50).

In this example, the correlation between the two currency pairs is represented by a number.

The correlations are likely to change over time, but you do not need to update your numbers every day. Generally, you should update at least once a month, if not more frequently.

How to use correlations to trade Forex?

Once you are familiar with calculating correlations, we can now discuss how to use them.

Firstly, they ensure that you don’t enter the same position twice. If you knew that EUR/USD and USD/CHF move in opposite directions nearly 100% of the time, you would understand why holding long EUR/USD and long USD/CHF is equivalent to holding virtually no position at all because the correlation indicates that when EUR/USD rallies, so will USD/CHF. Having long positions in EUR/USD and AUD/USD or NZD/USD is like doubling up on the same position because the correlation is significant.

Another critical factor is diversification. Since the EUR/USD and AUD/USD correlation is not always 100% positive, South African traders can use these two pairs to diversify their risk while maintaining a core directional approach. For example, to express a bearish outlook on the USD, the trader might buy one lot each of EUR/USD and AUD/USD instead of buying two lots of EUR/USD.

In contrast to the perfect correlation between the two different currency pairs, the imperfect correlation offers some diversification and a marginal reduction in risk. Further, Australia’s central bank has a different monetary policy outlook than Europe’s, so a dollar rally may affect the Australian dollar more than the euro or vice versa.

In addition to different pip and point values, traders can use them to their benefit. Take a look at the EUR/USD and USD/CHF once more.

The EUR/USD and USD/CHF have a nearly perfect negative correlation, but for a lot of 100,000 units, the EUR/USD pip move represents $10, and the USD/CHF pip move represents $9.24. This suggests that traders can hedge against EUR/USD exposure using USD/CHF.

Here’s how it would work:

Suppose a trader owned 100,000 USD/CHF and 100,000 EUR/USD short lots. An increase in EUR/USD by ten pips would result in a $100 loss for the trader. As the USD/CHF moves in the opposite direction of the EUR/USD, a short USD/CHF position would likely move up close to ten pips to $92.40.

In this scenario, the portfolio would lose -$7.60 rather than -$100. Of course, this hedge also means lower profits in case of a substantial EUR/USD decline, but losses should be relatively lower in a worst-case scenario.

It is imperative to be aware of the correlation between currency pairs and their shifting trends, regardless of whether you want to diversify your positions or find alternate pairs to leverage your view. This knowledge is powerful for all professional South African traders who hold multiple currency pairs on their trading accounts. Diversifying, hedging, and even doubling profits can be accomplished with this information.

Change of currency correlation in Forex

Currency correlations constantly change over time, which you should be aware of and alert to. Several political and economic factors have contributed to these changes. Factors such as separate monetary policies, price changes, and changes in central bank policies are usually involved.

Currency exchange rates are constantly changing, so it is vital to stay updated. The picture becomes more apparent if we check for long-term correlations. The correlations between currency pairs can be a highly effective tool for developing a Forex pair correlation strategy with a high probability.

By tracking correlation coefficients daily, weekly, monthly, or annual, you can make informed decisions in risk management.

FAQs

Yellow question mark on a background of black signs, FAQ Concept. 3D Rendering

  1. Should you trade correlated Forex pairs?

When two currency pairs move in tandem, they have a positive correlation; when they move in the opposite direction, they are said to have a negative correlation. So using correlations to realise a more significant profit or hedge your Forex exposure is one way to benefit from them.

  1. How do you read a Forex correlation?

When a correlation is +1, both currency pairs will move in the same direction 100% of the time. In the case of a correlation of -1, the two currency pairs will move in the opposite direction 100% of the time. The zero correlation indicates a completely random relationship between the currency pairs.

  1. How do currency pairs work in Forex?

A Forex broker offers currency pairs in which you buy the base currency and sell the quote currency. As a result, you receive the quote currency when selling a currency pair. Pairs of currencies are quoted using their bid (buy) and ask (sell) prices.

  1. What are the most correlated currency pairs?

Over time, correlations change, as stated in the article. Certain tendencies, however, remain the same. Exchange rates that tend to move together (i.e., with a strong positive correlation) tend to be:

EUR/USD – GBP/USD – AUD/USD – NZD/USD

USDCHF – USDJPY

Rather, currency pairs that move in opposite directions (i.e., have a negative correlation) are generally:

EUR/USD – USD/CHF

GBP/USD – USD/JPY

USD/CAD – AUD/USD

  1. What are the most stable currency pairs?

Significant currencies with the least volatility are EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, GBP/JPY, EUR/JPY, and USD/CAD.

Bottom line

Currencies can have positive or negative correlations. Correlations, positive or negative, provide an opportunity to benefit from a more significant profit or to hedge the exposure. Currency values can also be linked to the value or utility of commodities like gold and oil exports.

This Forex pair correlation calculator allows the user to enter a currency pair, a time frame, and several periods to calculate the correlation among significant and exotic currency pairs over multiple time frames.

This suggests that you can use correlations between currency pairs as confirmation bias before entering a trade if you know how currency pairs correlate.

Not only that, but you can also use it to confirm the trend. For instance, if the USD strengthens, all positively correlated Forex pairs should fall, and negatively correlated Forex pairs should rise. The best place to find trading opportunities near supply and demand zones is to combine Forex pairs that correlate with candlestick patterns.

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