Forex Market Correlation Cheatsheet
Master Currency Pair Relationships to Optimize Your Trading Strategy
Understanding Forex Correlation
Currency pair correlations are crucial relationships that can significantly impact your forex trading strategy. Understanding these correlations helps you avoid over-leveraging your portfolio with similar positions and allows you to build more balanced trading strategies.
TLDR Summary
- Positive correlation (> +0.7): Pairs move in the same direction (e.g., EUR/USD and GBP/USD)
- Negative correlation (< -0.7): Pairs move in opposite directions (e.g., EUR/USD and USD/CHF)
- Correlations change over time based on economic factors and central bank policies
- Trading correlated pairs simultaneously can amplify risk or create hedging opportunities
Correlation Strength Guide
Positive Correlation
No Correlation
Negative Correlation
Major Currency Pairs Correlation Matrix
This matrix shows the correlation coefficients between the most traded currency pairs in the forex market. Values represent 30-day average correlations based on hourly data.
| Currency Pair | EUR/USD | GBP/USD | USD/JPY | USD/CHF | AUD/USD | USD/CAD | NZD/USD |
|---|---|---|---|---|---|---|---|
| EUR/USD | +1.00 | +0.92 | -0.51 | -0.94 | +0.82 | -0.84 | +0.76 |
| GBP/USD | +0.92 | +1.00 | -0.42 | -0.89 | +0.78 | -0.79 | +0.72 |
| USD/JPY | -0.51 | -0.42 | +1.00 | +0.62 | -0.54 | +0.47 | -0.52 |
| USD/CHF | -0.94 | -0.89 | +0.62 | +1.00 | -0.81 | +0.83 | -0.78 |
| AUD/USD | +0.82 | +0.78 | -0.54 | -0.81 | +1.00 | -0.86 | +0.89 |
| USD/CAD | -0.84 | -0.79 | +0.47 | +0.83 | -0.86 | +1.00 | -0.82 |
| NZD/USD | +0.76 | +0.72 | -0.52 | -0.78 | +0.89 | -0.82 | +1.00 |
Currency Groups and Market Drivers
Currencies can be grouped based on their common characteristics and drivers. Understanding these groups helps predict correlation behaviors during different market conditions.
Safe Haven Currencies
- USD (US Dollar) - Traditional reserve currency
- JPY (Japanese Yen) - Low interest rates, carries funding currency status
- CHF (Swiss Franc) - Political stability, neutrality, banking secrecy
These currencies typically strengthen during market uncertainty and global economic distress.
Commodity Currencies
- AUD (Australian Dollar) - Tied to mining exports, gold, industrial metals
- CAD (Canadian Dollar) - Strongly influenced by oil prices
- NZD (New Zealand Dollar) - Agricultural exports, dairy products
These currencies correlate strongly with their respective commodity prices and global growth sentiment.
European Currencies
- EUR (Euro) - Eurozone economic data, ECB policy
- GBP (British Pound) - UK economic data, BOE policy
- CHF (Swiss Franc) - Often moves with EUR but with safe haven characteristics
These currencies are influenced by European economic news and tend to show some correlation due to geographic proximity and trade relationships.
Exotic Currencies
- Emerging market currencies - Higher volatility, risk-on/risk-off sensitivity
- Typically less liquid - Can show unpredictable correlations
- Examples: MXN (Mexican Peso), ZAR (South African Rand), SGD (Singapore Dollar)
These currencies often react more dramatically to global sentiment shifts and carry trade activities.
Trading Strategies Using Correlations
Incorporating correlation analysis into your trading can help manage risk and identify opportunities. Here are a few strategies:
Pair Trading (Statistical Arbitrage)
Exploit temporary deviations in strongly correlated pairs.
- Identify pairs with historically strong correlations (e.g., EUR/USD and GBP/USD).
- Monitor for divergence using indicators like Bollinger Bands or RSI.
- Enter trades when pairs deviate significantly, expecting them to revert to their correlated behavior.
Hedging with Negative Correlations
Use negatively correlated pairs to reduce portfolio risk.
- Trade pairs like EUR/USD and USD/CHF, which often move in opposite directions.
- Balance position sizes to offset potential losses in one pair with gains in the other.
- Monitor correlation strength to ensure the hedge remains effective.
Correlation-Based Position Sizing
Adjust position sizes based on correlation to manage risk exposure.
- Avoid over-leveraging by reducing sizes when trading highly correlated pairs.
- Use correlation data to diversify trades across less correlated pairs.
- Recalculate exposure regularly as correlations shift.
Practical Tools and Resources
Leverage these tools to monitor and analyze correlations effectively in your trading routine.
Correlation Calculators
- MyFXBook Correlation Tool - Real-time correlation matrix for major pairs.
- Investing.com Correlation Table - Customizable timeframes and pair selections.
- OANDA Correlation Tool - Historical and live correlation data.
Charting Platforms
- TradingView - Overlay correlated pairs for visual analysis.
- MetaTrader 4/5 - Use custom indicators to plot correlations.
- Thinkorswim - Advanced charting with correlation studies.
Recommended Routine
- Check correlations weekly to adjust your trading plan.
- Use a correlation calculator before entering trades on multiple pairs to assess combined risk.
- Monitor economic news releases that could significantly impact currency relationships.
Glossary of Terms
- Correlation Coefficient
- A statistical measure ranging from -1 to +1 that describes the degree to which two assets move in tandem.
- Positive Correlation
- When two currency pairs tend to move in the same direction. A coefficient close to +1 indicates a strong positive correlation.
- Negative Correlation
- When two currency pairs tend to move in opposite directions. A coefficient close to -1 indicates a strong negative correlation.
- No Correlation
- When there is no predictable relationship between the movements of two currency pairs. A coefficient close to 0 indicates no correlation.
- Safe Haven Currency
- A currency that is expected to retain or increase in value during times of market turbulence and economic uncertainty.
- Commodity Currency
- A currency whose value is strongly tied to the price of commodities that the country exports.
Disclaimer:
Forex trading involves significant risk of loss and is not suitable for all investors. The information provided in this cheatsheet is for educational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Always consult with a qualified financial advisor.