Forex Correlations / financial markets

Forex Correlations / financial markets
Study of the relationship of foreign currencies relative to scholarships - Forex, Forex Trader, Finance
The different exchange rates on the Forex can be highly interrelated, but they can also be linked to other markets like stocks or commodities.
Many correlations have a fundamental reason.
Here are some correlations from the beginning of 2009 between the Australian dollar, Canadian dollar, the CRB (a basket of commodities), the Dow (stock index), gold and oil (data source: DailyFX . com):
- Forex, Forex Trader, Forex FinanceCorrélations / financial markets

 The observation of these correlations shows that most are quite high and they are not negligible. One explanation for these correlations is such that countries like Australia and Canada are major exporters of raw materials, their revenues are directly impacted by changes in commodity prices which will tend to influence the course of their currencies.
But the main reason for these correlations are generally risk averse. Indeed, it is possible to classify the different asset classes according to their risk level. Fund managers will then vary the weighting of their portfolios based on the economic climate. Plus their economy look healthy, the more they will turn to risky assets as they are more profitable in the process of economic growth. The least risky assets are cash, investments, capital guaranteed, gold (especially if a period of inflation is expected), treasury bills ... assets are riskier emerging market equities, shares of small cap stocks, commodities ...


Among the currencies, a ranking is possible. On the one hand, the dollar retains its role as a refuge currency and will tend to rise during periods of economic downs. On the other hand, currencies "at risk" will tend to rise when the economy is doing well. This applies to all currencies outside the dollar: the euro, British pound ... The yen has a special status because it also becomes a currency of refuge lately.
To summarize, when the economic health appears good, scholarships rise, commodities rise and the dollar falls. Currency pairs with the dollar uncertainty (right) as the Euro Dollar, GBP / USD ... will tend to rise, that we can see from the chart below comparing the evolution of the Dow Jones and EUR / USD:
Changes in the Dow Jones and the EUR / USD - Forex, Forex Trader, Finance


The comparison of these two curves shows, however, some differences that will be interesting to watch for during the market trend as a likely return before the other, and can give an interesting indication about future courses.
The dollar index (or $ index) constructed by comparing the evolution of the dollar against a basket of currencies (euro, yen, British pound, Canadian dollar ...) can give the trend of the dollar. The $ index is also interesting to observe in parallel with some major currency pairs with the dollar as EUR / USD or GBP / USD because the same principle as using Charles Dow confirmation will be usable. The creator of the Dow Theory confirmation using this principle with evidence Rail Industrial Average and Average. According to his theory, the fact is a signal on the two indices to return to this position and to avoid the so-called false signals. The same principle can be used on the Forex, the $ index used for confirmation.The study of correlations between different markets is not easy but it can help in understanding the mechanisms of financial and capital flows. It will also be interesting for investors in several markets simultaneously stakeholders to address them in order to build an effective diversification.