Thread: Why such strong correlation of pairs?

Why correlation? Carry trade and risk desire

Basically currencies can be divided into two group, the beta aka'risk-on' currencies and the'safe haven' currencies. Risk currencies are countries where interest rates are set higher than the rates of their counterpart's nation'safe haven' currency'

Large percentage of FX flows are made by the investment side, eg hedge funds. Only a small percentage of FX transactions are created for commercial purposes.

Since all of us are living in a globalized economy right now, these fund managers will want to be on the watch for returns and opportunities abroad.

To accomplish this, they will borrow currency with lower rates and use the money to invest in currencies with high rates. In a prospering world economy, these funds will make a killing not only in the resources they spent in that nation but also amassing higher interest rates and appreciating exchange rate (recall that currency of a nation with higher interest rate is always more powerful than just one lower than it) and from whatever gains from securities they bought in the nation (equities etc)

In a uncertain world economy, carry trade movement will reverse, with fund managers liquidating their holdings in the nation with higher rates and exchange back for the currencies they originally borrowed in reduced rates.

So in our current scenario, Eurozone's interest rate is now at 1.25percent and in US rate is at 0.25percent

In a world where economy is growing, stable and risk appetite is high, EUR/USD will rise. The reverse is true when there are uncertainties. This risk on/off movements moves across the currencies board explaining the correlation. This correlation is not just just between currencies but also with equity indexes as well as bonds.

Hi all
There's a Connection as you Mentioned but Occasionally itbdoes take the Time to other currencies to move .this market is like a theromstaite You Cope with reserves that are balanced by central banks That You add to it rather than Just Taking out of it I think it solved a big Issue in finicial Platform
As it keeps liquidty inreach ofbcentreal banks to some extent I think this market solved a lot of problems just Exchange what you offer to Shed and would not change your life style or effect it
All have a Great day

Correlations persist over a very long time if state relations persist or come and go. Definitely major pairs (USD, EUR, JPY, GBP) will continue to affect each other on a regular basis. Particular currency pairs are closely linked, even connected, at different times depending upon various economic factors such as nation trading connections, central bank policies, economic news, etc.. A good illustration of closely associated currencies would be CHF and the EUR. Geography and economic ties also tend to go together. For instance, Australia and New Zealand will remain tied as currencies, just as the US and Canada.

But it is not just currencies that quickly affect other currencies, it is basically all financial markets --currencies, commodities, stocks, bonds impacting each other in a huge web of financial interaction. A sight for seeing a picture of different markets is Finviz.
http://finviz.com/futures_performance.ashx