Currency Correlations

Originally published in September 2019’s issue of Foreign Exchange Consensus Forecasts. The unabridged article and a recent sample issue are available to industry professionals. Simply send us an email at

Historical relationships between currencies can provide useful guidelines for both users of currency projections and those examining hedging or risk management strategies. The following study uses correlation analysis to examine some of the linkages between various currencies. The calculations were made using daily data over the period from March 1, 2019 to August 30, 2019 . To provide a longer term historical perspective, we have also calculated correlations using monthly data for the period from October 1992 – chosen to exclude the 1992 ERM crisis – through August 2019. The correlation coefficients shown in the tables indicate the degree to which two exchange rates move together, with positive values of close to one (+1.00) indicating that such currency pairs move very closely together and values nearer minus one (-1.00) indicating that the two currencies generally move in opposite directions. Values close to zero show that there is little or no relationship between the two currencies concerned.

For the sake of simplicity we have calculated correlations for the European and Asian currencies against the US dollar (USD), while correlations between the G-7 currencies (including the USD) were compared by using exchange rates against the Special Drawing Right (SDR, effectively a basket of the USD, EUR, JPY, GBP and CNY, which was added in 2016). Historical figures used for the euro prior to its launch are synthetic, calculated using a weighted basket of the original eleven component currencies. ISO 4217 codes for the currency identification symbols used in the tables are explained in the box below.

FX Correlation Risks

As is usually the case, most Western European currencies outside the euro zone have retained a very close correlation with the euro (EUR) over the past six months. The Danish krone (DKK) operated in perfect synchronisation (+1.00), due to its membership of ERM-2. However, directional linkages for the Norwegian krone (NOR, +0.78) and the Swedish krona (SEK, +0.81) appeared a little less than has historically been the norm  (Table 2), affected in part by an earlier slide in the price of crude oil and worries about the health of the global economy. Unusually for the Swiss franc (CHF), its daily movements appeared almost unrelated to the euro in our calculated coefficient for the latest observed period (+0.00). This change in 2019 reflects perhaps the influence of sustained eco-political uncertainty, the unresolved EU-Switzerland share trading row, and heightened risk aversion, which have unsettled global portfolio investments. Likewise, the UK pound (GBP) saw its calculated correlation with the euro slip to +0.60 between January and August 2019, down from +0.96 for the same analysis a year ago, due to Brexit related speculation and FX volatility. Chart 1 tracks the rolling 20 day relationship between the EUR and GBP exchange rates against the USD, highlighting directional links in the currency. Daily FX movements are, of course, influenced by a range of factors, including shifts in perceptions regarding monetary and fiscal conditions, as well as commodity prices and domestic and international politics.


Japanese Yen Moves in Opposite Direction

The link between the major Asian currencies and the Japanese yen (JPY) had been very close during much of 2018, reflecting the export-oriented nature of their economies and currency competitiveness considerations. However, the past six months has seen a dramatic pattern change, as capital flows shifted in response to a turnaround in US monetary policy and the US-Sino trade standoff. Rather than move in the same downward direction as these currencies, the JPY has had a tendency to appreciate as investors flocked to safety. Its calculated coefficient with the Chinese renminbi (CNY)  was -0.92 in the six months to end August, compared with +0.75 during the same period a year ago. In addition, readings of -0.82 and -0.72 were registered against the South Korean won (KRW) and Taiwanese dollar (TWN) . A notable exception has been the Thai baht (THB), which scored +0.88, amid support from an enormous current account surplus and an election in March that calmed fears about domestic political instability.


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