Analysis of the Correlations Truths and Myths in the Forex Market

Forex traders tend to apply the concept of ‘fixed correlations’ when analyzing the Forex market. These are quick and standard ideas about how the Forex market works in general. Here are some examples:

  • The EURUSD will generally do the opposite of the USDCHF
  • The EURUSD and GBPUSD move in the same direction
  • The GBPUSD will generally do the opposite of the USDJPY

This blog post will analyze currency correlations and judge whether they are truths or myths!

Please join the debate by adding your thoughts and comments down below.

USDCAD VS US OIL: VERY TRUE

The USDCAD is known for its inverse (or opposite) relationship with the price of oil but whether there is any truth in that well established equation could remain a question mark until you see the chart below.

13- 2- 2015 usdcad vs oil

The chart shows the USDCAD (candle sticks) versus the price of U.S. oil (purple line). The chart provides a striking account of how close the loonie and oil really are. Almost all relatively low price levels of oil are connected to relatively high exchange rate of the USDCAD. Most dramatically the rise of the price of oil sends the USDCAD plummeting and the most recent drop of oil price catapults the USDCAD into a massive bullish momentum.

AUDUSD VS GOLD: YES BUT RECENT EXCEPTIONS

Most of the time the AUDUSD is in sync with the Gold but there are a good number of spots on the chart where the two diverge away from each other (circles). Especially in the recent two years this has led to AUDUSD having more relative strength than XAUUSD in two cases (green circles) and relative weakness in the last few months (orange circle).

13- 2- 2015 aussie vs gold

EURUSD VS GBPUSD: YES CLOSE

The recent uptrend of the US Dollar has caused downside pressure on both the EURUSD and GBPUSD. In general, the two currency pairs are quite closely correlated in their movement but they do occasionally differ. In the chart below, this happened when the EURGBP was making a trend and British Pound was winning terrain versus the Euro, which occurred twice:

  1. GBPUSD was climbing with much more speed than the EURUSD during 2013 and 2014;
  2. GBPUSD was falling a lot slower than the EURUSD during 2014 and 2015.

13- 2- 2015 eu vs gu day 

When analyzing the bigger picture on the monthly chart, Forex traders are able to observe the same close relationship albeit with one fundamental difference. The financial crises hit the price development of the GBP a lot harder. The GBPUSD fell much quicker than the EURUSD during the years of 2008 and 2009. The subsequent triangle was quite similar with the exception of the last 2 years as explained in the section on the daily chart.

13- 2- 2015 eu vs gu month

EURUSD VS USDCHF: STRONG BUT SNB INTERVENTION

The EURUSD and USDCHF indeed are total opposites of each other when looking at the weekly chart. All of the valleys and rises neatly copy each other in an inverse relationship. The most interesting part of this chart is the price movements of the recent weeks. When the Swiss National Bank (SNB) withdrew its publicly announced intervention and released its peg of 1.20 on the EURCHF, all the Swissy currency pairs including the USDCHF dropped. Here we see a moment when both the EURUSD and the EURCHF were on the fall. The past 2 weeks however the USDCHF has already rebounded further than the EURUSD.

13- 2- 2015 eu vs uc 

USD VS US 30: MIXED RELATIONSHIP

The US Dollar typically moves opposite of the US stock market (Dow Jones for this graph). That means when stocks go up, the USD goes down – and the other way around. But does this relationship indeed prove to be true in the last 4 years? The weekly chart below shows that track record is scattered at best. In some cases the USD clearly moves into opposite direction, which is indicated by the green circles. But in other times the USD moves in sync (blue circles). The reason for the discrepancy might be caused by the Quantitative Easing (QE) programs which have boosted the US30 throughout the last 4 years.

13- 2- 2015 usd vs us30

CADJPY VS OIL: MIXED BAG

The Quantitative Program (QE) program of the Bank of Japan (BOJ) also has created a different picture than expected. Typically CAD strength is expected when oil prices are strong because Canada as an oil producing country is benefiting from higher oil prices. The relationship holds true until 2010 when the CADJPY dropped but oil prices went up (blue circle). One of the explanations could be the investor’s flight for safety into the Yen in times of economic and financial insecurity. The discrepancy decreased when BOJ introduced the start of its QE program, and the Yen weakened against the Canadian Dollar just as it did with all other currencies (green circle). Most recently the CADJPY made a quick rise and fall (orange circle). The rise was due to the Yen weakness continuation. The fall can be attributed to the strong decline on the price of oil.

13- 2- 2015 cj vs oil 

Are there certain currency pairs that you would like to see added to the above list that have not been examined?

What do YOU think of the correlations that been examined in the list? Are there currency pairs that have more or less correlation?

Thank you for adding your comments and sharing this post. As always, wish you Happy Hunting and a great weekend.

Ps. Please note that the analysis is only completed by a visual reference to the chart and no statistical analysis has been applied. The charts also might look different if the axis is changed and correlations can change in the future.

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