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Correlation of Pairs

  • #1
  • First Post: Dec 8, 2005 3:30pm Dec 8, 2005 3:30pm
I tried a search but must not be asking the right questions.

Some pairs run roughly opposite : Eur/Usd vs Usd/Chf

Others run roughly similar . What is the relationship between Eur/Usd and Usd/Jpy

Thanks.

Lou
  • #2
  • Dec 8, 2005 3:37pm Dec 8, 2005 3:37pm
Lou,

check out this site: http://www.dailyfx.com/

They have fx correlations available and are updated monthly.
"You can make money or you can make excuses, you can't do both". unknown
  • #3
  • Dec 8, 2005 3:46pm Dec 8, 2005 3:46pm
Quoting Lou
I tried a search but must not be asking the right questions.

Some pairs run roughly opposite : Eur/Usd vs Usd/Chf

Others run roughly similar . What is the relationship between Eur/Usd and Usd/Jpy

Thanks.

Lou
lou, i think you are referring to which side of the "/" USD is on. so pairs with USD on the left side (like USDJPY, USDCHF) will run "roughly similar" because the USD is on the same side.

so the relationship between EURUSD and USDJPY is roughly opposite. if EURUSD is going up, it means the dollar is weakening, whereas if the USDJPY is going up it means the dollar is strengthening. is that what you were asking? or are you asking about the fundamental relationship between economies?
Relax and be happy.
  • #4
  • Dec 8, 2005 7:48pm Dec 8, 2005 7:48pm
I think Lou is asking about the strength of correlation between the pairs. Or in other words, if the EUR/USD is moving up, what is the probability or how likely that the USD/CHF will move down following it?? And how likely will the USD/JPY will move up in such a case?? And so on...

From my poor observations, EUR/USD and USD/CHF are moving in opposite directions 80-85% of the time..

GBP/USD and EUR/USD are moving the same way 60-65% of the time..

EUR/USD and USD/JPY are moving in opposite directions 40-50% of the time..

EUR/USD and USD/CAD are moving in opposite directions 20-25% of the time..

EUR/USD and AUD/USD are moving the same direction 30-35% of the time..


Of course, all were related to the EUR/USD movement, you can base your observations on another pair, for example, see how the EUR/USD follow the GBP/USD or see how the GBP/USD follow the USD/JPY and so on...


Thanks,

Nader
  • #5
  • Dec 8, 2005 8:17pm Dec 8, 2005 8:17pm
Thank you, everyone. Just what I was looking for.

I especially liked the %

Lou
  • #6
  • Dec 8, 2005 11:35pm Dec 8, 2005 11:35pm
I trade Cable.

On one screen I have a 5 min Cable chart on the right side. The left 50% is split with verticals of CHF, Yen and Euro.

I watch the other 3 closely and use as a leading indicator / filter, right B4 I am about to enter or exit a trade.

Yesterday morning was a great example. There was a great short on Cable @ 1.7360 area, though the other 3 all broke support or resistance, with thrust candles, against my trade. A few minutes later Cable followed. I ended up taking the break out (the other direction) for a big score.

If I am about to enter a Cable trade and either Yen or CHF moves more than 5/6 pips againt my trade, at that very momment, I will hold off for a few moments, delaying the entry decision.

Check out the attached article, which I think is one of the most important I have read this year. Tried to get a thread going on it B4 without much response.
Attached File(s)
File Type: pdf Currency Personalities.pdf   706 KB | 3,877 downloads
  • #7
  • Dec 9, 2005 12:58am Dec 9, 2005 12:58am
Quoting Lou
I tried a search but must not be asking the right questions.

Some pairs run roughly opposite : Eur/Usd vs Usd/Chf

Others run roughly similar . What is the relationship between Eur/Usd and Usd/Jpy

Thanks.

Lou
Hi Lou,
This site has a chart that updates daily and even hourly at 5, 20 and 100 intervals.

http://www.mataf.net/en/analysis-correlation.htm

HTH
Forex Trading: The hardest way to make easy money.
  • #8
  • Dec 11, 2005 5:40pm Dec 11, 2005 5:40pm
Hi, I think mataf and dailyfx are fine for a quick overview of correlations though I would recommend doing the following if you are really interested the co-behaviour of e.rates:

* Download end of day rates going back a few years (you can get free data from many web-sites).
* Calculate the correlations for the relevant periods, maybe 30 day, 90 day, and 1 year.
* That brings you to the same point as dailyfx and mataf tables.
* Now drag the correlation formula down to calculate the rolling correlation (ie see how the 30 day correlation, for example, has changed over time). Because currency correlations can be highly unstable for many rates, this is important. You can chart the rolling correlations over time to see exactly how volatile or reliable these correlations are. I'm surprised mataf and dailyfx don't provide these charts.
* The last thing I would consider doing would be to look at correlations of returns (% change, or log returns) versus just looking at the absolute levels (again, this is what mataf and dailyfx do). This could be important because currencies trend together (eg cable and EUR/USD) but if you are a short-term trader you may be more interested in asking specifically 'if EUR/USD returns 1% today, what will cable return?'

(If you are interested I wrote a piece on the correlation between cable and EUR/USD in my blog, but its slightly dated now, and behaviours may have changed.)

: )
"Always bet on black"
  • #9
  • Dec 12, 2005 2:59am Dec 12, 2005 2:59am
Read this article by Kathy Lien on how to do this using a spreadsheet. If you use MT4 then change the view to daily, save the chart as a text file and import into a ss.
  • #10
  • Edited 3:27am Dec 12, 2005 3:21am | Edited 3:27am
Quoting narafa
From my poor observations, EUR/USD and USD/CHF are moving in opposite directions 80-85% of the time..
err....why waste your time with observations when you can just look at the EURCHF chart. that will tell you exactly what the correlation is. same with all currency pairs...if you want to know the correlation with the EURUSD and USDJPY, just look at the EURJPY etc etc...
Relax and be happy.
  • #11
  • Dec 12, 2005 6:09am Dec 12, 2005 6:09am
i beleive this is called triangular arbitrage, or something similar, if i remember from my time spent studying international finance (while i was awake during lectures, that is...!)
  • #12
  • Dec 12, 2005 6:18am Dec 12, 2005 6:18am
Quoting Trumpcard
i beleive this is called triangular arbitrage, or something similar, if i remember from my time spent studying international finance (while i was awake during lectures, that is...!)
thats exactly what it is.

you should tell the guys in the grad vs. non-grad thread that school CAN help you in trading!
Relax and be happy.
  • #13
  • Dec 12, 2005 6:32am Dec 12, 2005 6:32am
Quoting merlin
err....why waste your time with observations when you can just look at the EURCHF chart. that will tell you exactly what the correlation is. same with all currency pairs...if you want to know the correlation with the EURUSD and USDJPY, just look at the EURJPY etc etc...
I don't think this will bring the correlation between the 2 pairs the same way you look at the other 2 pairs...

When you are looking at the EUR/CHF, you are see the grand total of the movement of the other 2 pairs, the EUR/USD and the USD/CHF, but you don't actually know what happened there for everyone...Someone might have moved up modestly with the other steady, so the EUR/CHF went up, someone might have moved up sharply and the other down slightly, so the outcome will be the same on the EUR/CHF chart as the first case...

What I am trying to say is that when you look at the EUR/CHF, you are seeing the product of the moves of the other 2 pairs, so you actually don't figure out the full relation between the 2 pairs..

As an example:

The EUR/CHF is trading at 1.5500, the EUR/USD is trading at 1.2000, and consequently the USD/CHF is trading at 1.2916

The EUR/CHF moves up to 1.5600, the outcomes here are so much:

1- Did the EUR/USD kept trading at 1.2000 and the USD/CHF went up to 1.3000?

2- Did the USD/CHF kept trading at 1.2916 and the EUR/USD went up to 1.2078?

3- Did the USD/CHF went up to 1.2950 and the EUR/USD went up to 1.2046?

The above 3 cases don't apply for the inverse correlation.

4- Did the USD/CHF went down to 1.2850 and the EUR/USD went up to 1.2140?

5- Did the USD/CHF went up to 1.3050 and the EUR/USd went down to 1.1954?

The above 2 cases apply for the inverse correlation.


So what actually happened? You can't actually know just by watching the chart of the EUR/CHF man...


Thanks,

Nader
  • #14
  • Dec 12, 2005 7:22am Dec 12, 2005 7:22am
iso,

I've just read the link to the piece by Kathy Lien. Overall, a good overview.

She does mention using a trailing correlation (which I earlier called a rolling correlation). This is so much better than just looking at tables. However, she doesn't talk about using returns to calculate the correlations, which is important. I look at charts initally, but the problem is that two currencies may be trending or drifting together over the long-term, but are not correlated on a day to basis. This can and does happen.

Also, she talks about hedging a EUR/USD exposure with USD/CHF, something I really disagree with. Why not just reduce your EUR/USD exposure? By hedging like this, you are paying out more spread, and leave yourself susceptible to a shift in the correlation that risks making your hedge less effective. Not good.

: )
"Always bet on black"
  • #15
  • Dec 12, 2005 2:12pm Dec 12, 2005 2:12pm
Good reply abob - as far as correlations go, the basics is all I know! :

I'm not a great fan of hedging either for reasons you have stated but again I'm not an expert there either. (Looks like I have some reading to do!)

For the Investopedia article why not reply with your questions to her? You clearly know your stuff so I think she would be interested in your comments too.

Quoting abobtrader
iso,

I've just read the link to the piece by Kathy Lien. Overall, a good overview.

She does mention using a trailing correlation (which I earlier called a rolling correlation). This is so much better than just looking at tables. However, she doesn't talk about using returns to calculate the correlations, which is important. I look at charts initally, but the problem is that two currencies may be trending or drifting together over the long-term, but are not correlated on a day to basis. This can and does happen.

Also, she talks about hedging a EUR/USD exposure with USD/CHF, something I really disagree with. Why not just reduce your EUR/USD exposure? By hedging like this, you are paying out more spread, and leave yourself susceptible to a shift in the correlation that risks making your hedge less effective. Not good.

: )
  • #16
  • Dec 12, 2005 5:53pm Dec 12, 2005 5:53pm
Hi iso dude, I did indeed em her a few weeks ago with suggestions for the dailyfx.com correlation analysis. She liked the ideas, but was swamped with other things...life goes on
"Always bet on black"
  • #17
  • Mar 31, 2006 3:59pm Mar 31, 2006 3:59pm
Quoting mpotis
Lou,

check out this site: http://www.dailyfx.com/

They have fx correlations available and are updated monthly.
friggin' amazing! thanks for this link!
Profitsee - Knowing the future is not enough.
  • #18
  • Last Post: Mar 31, 2006 7:58pm Mar 31, 2006 7:58pm
I've seen this correlation in 4 hour charts and see that when you overlay the graphs, the correlation itself signals going long one pair and short the other, but like any other system, there are a lot of false signals, as if the two are headed together, but suddenly reverse in opposite directions, per the strong corrolation characteristic.

A midpoint line presents itself, where the upper pair and lower pair may or may not meet. It would be presumably unlikely the values of the pairs, relative to their appreciation/depreciation, if they did meet would stay at this line for long time (due to the high probability of negative corrolation). The probability being greater that they would move apart and staying apart before moving back together again presents itself.

Sell in the money options on the upper pair, and buy out of the money options on the lower pair. Build more on the upper premium than the buying the lower. Inevitably the pairs would shift inward, and either you make money on the upper, or the lower would go up further than the upper goes down. And they don't necesary have to to intersect, its just playing this .90 - corro play around the midpoint the two pairs are being pushed and pulled away from.

The trade could blow up if the difference persisted againt the play to the midpoint, so you'd have to sell up notch and forget buying the lower calls.
The other play would be to short the upper in FX and buy the lower in FX,, and buy out of the money options on the upper FX and sell out of the money beneath the lower FX. The "drawdown" would be Flat Corro + Upper Calls and Lower Put. You have to be a judge to how much the negative corro inwards would profit, then buy and sell around it. If the profit is healthy, they I guess you could do it, even after factoring the prices for the options in the play.

What a concept you gotten me heated on. I can't get this out of my head!
Profitsee - Knowing the future is not enough.
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