Forex Correlations (August): Dollar, Swiss Franc and Japanese Yen's Role as Safe Havens Shifting

Over the past month, we have seen a sharp revival of risk appetite; but the market’s preference for safe haven versus those with potential for speculative appreciation have changed dramatically.
The following is our monthly correlations update for August. As we have stated time and again, correlations between different currency pairs will inevitably shift over time. Therefore, it is of utmost importance to keep abreast of these fluctuating relationships to fully understand your trades and portfolio. Below are the one-, three-, six- and twelve-month correlations for the seven major currency pairs. Additionally, we have included the six-month trailing correlation for the majors against the EURUSD for a different view of correlation.
In order to be an effective trader, it is important to understand how different currency pairs move in relation to each other. There are a few reasons why this is significant, but most importantly, it allows traders to understand their exposure. For example, having a portfolio that consists of the USDCHF and EURUSD is different than having a portfolio comprised of USDCHF and USDJPY. Over the past month, we have seen a sharp revival of risk appetite; but the market’s preference for safe haven versus those with potential for speculative appreciation have changed dramatically. In this period, a currency that was often hailed as one of the two three carry currencies – the Swiss franc – has seen considerable deviation from the normal path of risk appetite that has been carried by the Japanese yen alone. Through the third of these low yield currencies in – the US dollar – and the correlations (or lack thereof) are laid bare. In the past month, we have seen the trouble in the Swiss banking sector and SNB intervention break the franc’s rudder as the low risk currency in the USDCHF pair and leave the correlation between the two near zero (0.00). In the absence of risk appetite and aversion, franc traders are drawn to the health of the small economy which is heavily influenced by the health of its primary trade partner – the Euro Zone. In the past month, the correlation between EURUSD and USDCHF has soared to near lock-step levels (-0.96). Clearly, having a long position in EURUSD and USDCHF at the same time would have the general effect of one cancelling the other out. Of course, these two currencies may have different pip values and the correlation is not perfect, so the P/L will not be exactly zero. Falling into the middle ground, the returns of a long USDCHF and USDJPY position would in essence reflect two totally independent positions (though don’t expect this free-floating relationship to last forever).
Furthermore, we can tell from our tables correlations rise and fall through different periods. Monitoring the changes in these relationships, further clarifies the underlying changes in risk appetite and those currencies that are at the extremes of the speculator’s spectrum. Juxtaposing a currency that was once held a safe haven currency, but that is now holds a very different influence against its US counterpart; USDCHF has seen its relationship with AUDUSD tighten with time. Over the past year, AUDUSD would take the opposite path to USDCHF only 34 percent of the time (-0.34). However, just over the past month, these high risk currency pair (AUDUSD) and former safe haven leader (USDCHF) has seen a far more consistent pace amongst each other. Overall, having this knowledge will allow traders to effectively diversify and manage their portfolios over time.
Regardless of your trading strategy and whether you are looking to diversify your positions or find alternate pairs to leverage your view, it is very important to keep in mind the correlation between various currency pairs and their shifting trends.