subject: Currency Pair Correlations [print this page] Therefore, the GBP/JPY must be slightly correlated to one or both of the other currency pairs. Even so, the inter-dependence amongst these currencies will stem from more than the fact that they are in pairs. While there are some currencies that will move one behind the other, the other currency pairs can move in different directions often resulting in a more complex force. In the financial world, correlation is the statistical measure of a relationship between two securities.
Then there is the correlation coefficient that ranges between -1 and +1. The correlation of +1 indicates that two currency pairs can move in the same direction nearly 100% of the time. While the correlations of -1 indicates that two currency pairs are likely to move in the opposite direction 100% of the time. If the correlation is zero, this indicates that the relationships between the currency pairs will be completely at random.
Correlations are not always stable. Correlations change, just as the global economic system and other various factors can change on a daily basis, making the ability to follow the shift in correlations very important. The correlations of today may not be in line with the long-term correlations between any two-currency pairs. This is why it's suggested to take a look at the past six months' trailing correlation to provide a more clear perspective on the average relationship between the two currency pairs. This change is the result of a variety of reasons the most common reasons being a currency pair's predisposition to commodity prices, the diverging monetary policies and unique political and economic circumstances.
