With
this knowledge of correlation, let's look at the following tables, each showing
correlations between the major currency pairs during the month of February
2010.
The
upper table above shows that over the month of February (one month) EUR/USD and
GBP/USD had a very strong positive correlation of 0.95. This implies that when
the EUR/USD rallies, the GBP/USD has also rallied 95% of the time. Over the
past 6 months though, the correlation was weaker (0.66) but in the long run (1
year) the two currency pairs still have a strong correlation.
By
contrast, the EUR/USD and USD/CHF had a near-perfect negative correlation of
-1.00. This implies that 100% of the time, when the EUR/USD rallied, USD/CHF
sold off. This relationship even holds true over longer periods as the
correlation figures remain relatively stable.
Yet
correlations do not always remain stable. Take USD/CAD and USD/CHF, for
example. With a coefficient of 0.95, they had a strong positive correlation
over the past year, but the relationship deteriorated significantly in February
2010 for a number of reasons, including the rally in oil prices and the hawkishness of the Bank of Canada.
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