Currency Pair Correlation

Currency pairs do not move independently of each other. Many pairs are correlated, meaning they move together. Understanding correlation is essential for good risk management.

What Is Correlation?

Correlation is a statistical measure that indicates how two currency pairs move together. The correlation coefficient ranges from -1 to +1.

Positive Correlation (+1)

Two pairs move in the same direction. For example, EUR/USD and GBP/USD often have a strong positive correlation.

Negative Correlation (-1)

Two pairs move in opposite directions. For example, EUR/USD and USD/CHF are often negatively correlated.

No Correlation (0)

Two pairs have no relationship. They move independently of each other.

Why Correlation Is Important

1. Risk Management

If you are long on EUR/USD and GBP/USD, you are essentially twice long on the dollar. Your risk is doubled without you knowing it.

2. Hedging

You can use negatively correlated pairs to reduce your risk.

3. Diversification

Choose pairs with low correlation to diversify your portfolio.

Well-Known Correlations

High Positive Correlation

• EUR/USD and GBP/USD
• AUD/USD and NZD/USD
• EUR/USD and EUR/GBP

High Negative Correlation

• EUR/USD and USD/CHF
• GBP/USD and USD/JPY

How Correlation Changes

Correlation is not constant. It can change due to:

• Changes in monetary policy
• Economic developments
• Political events
• Market sentiment

Tips

• Check correlation before opening multiple positions
• Be aware of hidden risk from high correlation
• Use correlation for hedging
• Review your correlation regularly

Conclusion

Correlation is a powerful tool for risk management. It helps you discover hidden risk and better diversify your portfolio.