Currency correlation refers to the relationship between two different currency pairs. A positive correlation means that the currency pairs move together in sync, whereas a negative correlation implies that the currency pairs each move in a different direction, away from each other.
If a relatively new trader intends to trade more than one currency pair at a time, it is important to have a firm grasp on how the different currency pairs move in relation to one another.
Correlation between the currency pairs is determined by what is known as the currency correlation coefficient and this ranges between -1 and +1. A coefficient of +1 will imply that the pairs move identically in the same direction 100% of the time and conversely a coefficient of -1 will imply that they move in different directions 100% of the time. Obviously, values within this range will imply different levels of movement between the related pairs.
Where the correlation coefficient is zero, this implies that the movement of the currency pairs is random and not related to each other.
Key takeaways:
- Currency correlation refers to the relations between two different currency pairs.
- There are two types of currency correlation, namely, positive and negative.
- The coefficient is the correlation between the two currency pairs.
- A perfect positive correlation has a coefficient of +1 and a perfect negative correlation has a coefficient of -1.
- If the correlation is 0, it implies that they are random and move independently from one another.