Forex Correlations
Correlation measures how closely two markets move together. In forex, many pairs share a currency, and many currencies are tied to commodities or bond yields. Knowing these links stops you from taking the same bet twice without realising it.
The Correlation Coefficient
Correlation is shown as a number called the correlation coefficient, from −1 to +1. It is usually calculated on daily price changes over a set period, such as the last 50 or 100 days.
| Coefficient | Meaning |
|---|---|
| +0.8 to +1.0 | Strong positive — almost the same trade |
| +0.5 to +0.8 | Moderate positive |
| −0.5 to +0.5 | Weak or no reliable link |
| −0.8 to −0.5 | Moderate negative |
| −1.0 to −0.8 | Strong negative — almost a mirror image |
Example
Over the last 100 days, EUR/USD and GBP/USD have a correlation of +0.85. On most days when EUR/USD rises, GBP/USD rises too.
EUR/USD and USD/CHF have a correlation of −0.90. When EUR/USD rises, USD/CHF usually falls.
Note: Correlation shows direction, not size. Two pairs with +0.9 correlation can still move by very different numbers of pips.
Why Pairs Are Correlated
The main reason is a shared currency. EUR/USD and GBP/USD both have USD as the quote currency. When the dollar weakens across the board, both pairs rise.
When USD is the base in one pair and the quote in the other, the link flips. EUR/USD and USD/CHF both depend on the dollar, but in opposite positions, so they move in opposite directions. The euro and the Swiss franc are also closely linked economically, which makes this mirror effect stronger.
Tip: Quick rule: if USD is on the same side of both pairs, expect positive correlation. If it is on opposite sides, expect negative correlation.
Typical Pair Correlations
These are typical ranges seen over recent years. Real values change all the time, so always check a current correlation table before relying on them.
| Pair A | Pair B | Typical range | Why |
|---|---|---|---|
| EUR/USD | GBP/USD | +0.70 to +0.90 | Both vs USD; linked European economies |
| AUD/USD | NZD/USD | +0.85 to +0.95 | Both vs USD; close trade partners |
| EUR/USD | AUD/USD | +0.50 to +0.75 | Shared USD; AUD also driven by risk |
| EUR/USD | USD/CHF | −0.80 to −0.95 | USD on opposite sides; EUR and CHF linked |
| GBP/USD | USD/CAD | −0.40 to −0.70 | USD on opposite sides |
| EUR/USD | USD/JPY | −0.30 to −0.70 | Varies; JPY has its own drivers |
| EUR/USD | EUR/GBP | −0.20 to +0.40 | Weak; different quote currencies |
Warning: Correlations can break down suddenly, for example when one country's central bank surprises the market. A pair of currencies that moved together for months can split apart in a day.
Commodity Currencies
Some currencies are closely linked to the commodities their country exports. These are called commodity currencies.
AUD — gold & iron ore
Australia is a major exporter of iron ore, gold and coal. Rising gold and iron ore prices tend to support AUD/USD. China's demand for iron ore matters a lot.
CAD — crude oil
Oil is Canada's largest export. When oil rises, CAD tends to strengthen, so USD/CAD tends to fall (negative correlation with oil).
NZD — dairy
New Zealand is the world's largest dairy exporter. Global dairy auction prices can move NZD, though less than oil moves CAD.
Example
OPEC+ announces a surprise output cut and WTI crude jumps 6%.
Traders buy CAD. USD/CAD falls from 1.3600 to 1.3520 — a drop of 80 pips.
Note: The Norwegian krone (NOK) is also oil-linked, and the Swiss franc and Japanese yen often rise with gold during risk-off periods. See Sentiment & COT.
JPY, Bonds and Yields
A bond yield is the return investors get for lending to a government. Higher yields attract money. The gap between two countries' yields (the yield spread) is one of the strongest long-term drivers in forex.
USD/JPY is especially sensitive to the US 10-year Treasury yield. When US yields rise and Japanese yields stay low, holding dollars pays more than holding yen, so USD/JPY tends to rise.
Example
The US 10-year yield rises from 4.10% to 4.35% over a week after strong data. The Japanese 10-year yield is unchanged.
The US–Japan yield spread widens by 0.25 percentage points, and USD/JPY climbs from 150.00 to 152.20.
Info: Other intermarket links worth knowing: a weaker US dollar often lines up with stronger gold; stock-market rallies usually help AUD and NZD and hurt JPY.
Avoiding Double Exposure
The most practical use of correlation is risk control. If you open two trades on strongly correlated pairs, you have not made two separate bets. You have made one bigger bet.
Example
Your account is $10,000 and you risk 1% ($100) per trade. You buy EUR/USD, GBP/USD and AUD/USD.
Trades: 3 × $100 risk = $300 What you really bet on: USD weakness If the dollar rallies, all three can hit their stops together. Real risk ≈ 3% on one idea, not 1%.
A better plan: pick the strongest setup of the three, or split $100 of risk across them.
Double exposure
Long EUR/USD + long GBP/USD (positive correlation, same direction). Wins and losses stack.
Hidden hedge
Long EUR/USD + long USD/CHF (negative correlation, same direction). The trades largely cancel out — you pay two spreads for little net exposure.
Tip: Before opening a new trade, list your open trades by currency: "+EUR, −USD" for a EUR/USD long, and so on. If one currency appears on the same side three times, you are overexposed to it. More on this in Risk Management.
Test Yourself With Exercises
A correlation of −0.92 between two pairs means…
- They move together most of the time
- They usually move in opposite directions
- There is no relationship
Oil prices jump. What is the most likely effect on USD/CAD?
- It rises
- No effect
- It rises only during Asian hours
- It falls
You risk 1.5% each on long EUR/USD and long GBP/USD (correlation +0.88). Roughly how much is at risk on the "weaker USD" idea?
- Close to 3%
- 0.75%
- 1.5%
Which currency is most closely linked to iron ore and gold prices?
- CAD
- JPY
- AUD
- CHF
US 10-year yields rise while Japanese yields stay flat. USD/JPY most likely…
- Falls
- Rises
- Stays flat