The FX market is like to a bipolar schizophrenic patient who continually eats chocolate, enjoys enormous sugar highs, and has erratic mood swings all day.
We’re not even kidding.
Currency correlations between currency pairs can be strong or weak for days, weeks, months, or even years, but they can vary and can alter unexpectedly.
This month’s strong currency connections may be quite different next month.
Check out the table below.
Examine the coefficients for a particular pair over time frames.
Do you have any observations?
For the most part (thanks, USD/JPY! ), they differ across the board, shifting from one time frame to the next. And they shift in every way.
The takeaway is that currency connections change, and they alter frequently.
And they can vary dramatically quickly, as evidenced by the EUR/USD at the 1- and 3 Month intervals.
That is a huge swing!
Because of the currency market’s frequent attitude fluctuations, inform you of the current currency connections.
For example, the correlation between USD/JPY and USD/CHF over a one-week period was 0.22. This is a very low correlation coefficient, indicating that the pairs have a negligible relationship.
However, if we look at the three-month data for the same time period, the figure rises to 0.52, 0.78 for six months, and 0.74 for a year.
This example shows that these two pairs suffered a “break-up” in their long-term correlation connection. What was once a strong positive relationship has significantly weakened in the near run.
They would have felt they were incompatible if they were a real couple and had just dated for a month or less.
They had no idea how quickly the passion will erupt!
Here’s an illustration of how currency correlations can vary and move about by looking at EUR/USD and GBP/USD.
The one-week timeframe has a very good association with a coefficient of 0.94!
…However, this link deteriorates significantly in the one-month period, dropping to 0.13, then improving to a robust 0.83 in the three-month period, then declining to a poor correlation in the six-month following period.
Here’s an extreme example of how currency correlations can shift dramatically.
Let’s look at USD/JPY and NZD/USD.