Uncorrelated Currency Pairs

[nishantsomani]

Hello Fellow Traders,

I wish to know the few most "uncorrelated pair" viz. the closest to zero correlation... i tried to google but the results have turned out to be quite weird!.. If one site is showing 0.87 correlation for a particular pair then some other site is showing 0.15 for the same... The difference is huge...

So if anyone does know the most consistent uncorrelated pair (either gained by personal experience or some statistical proof) please let us know.

Kind Regards

 

[superfuego]

Sorry this isn't the most helpful answer, but this is my experience with that. I was interested in a matrix (symmetric, of course) of the correlations of different indexes. It turned out I just had to calculate it myself, which is what I'd suggest you do if you can program.

 

[Rhody Trader]

First of all, correlations change over time and based on you look-back period, so don't expect any to be permanently fixed.

Second, any time you are comparing two pairs there's a good chance you're really just looking at a cross. For example, a long EUR/USD matched with a long USD/CHF (a common paired position because the two are generally negatively correlated) is really a long EUR/CHF position in the main (depending on position sizing).

Having said that, the most positively correllated pairs are going to be those which share a base or quote currency. For example USD/JPY and USD/CHF will positively correlated for the most part, as will EUR/USD and GBP/USD. Negative correlations come in when you match a base and quote set of the same currency, such as the aforementioned EUR/USD and USD/CHF.

If you want uncorrelated you have to look to pairs which have no common currency to them. For example USD/JPY and EUR/GBP might fit the bill (I haven't run the figures, I'm just tossing it out as an example of what you'd be looking for).

 

[fayalac]

Even more, correlated or uncorrelated pairs doesnt mean a protection or hedge, if you are looking for it, each pair correlated or not depends on two currencies, so lets say EUR/USD and GBP/USD may have some correlation because both use USD as base currency but the behavior of a specific pair depends on both currencies USD can be into a weakening process against EUR but GBP could also be weakening for specific facts so the behavior at the end of the day could not be the same at both pairs. Bloomberg is a good source of first hand news.

 

[nishantsomani]

Thanks everyone for putting up essential thoughts!..
@ rhody trader - thanks for suggesting example of USDJPY & EURGBP.

Actually what i'm necessarily looking for is not hedging but diversification. Taking 1 lot short position in EURUSD and 1 lot long in USDCHF undisputedly tantamount to taking a position of 2 lot in either of the currency and thereby risk is unnecessarily increased. Now say, another trader who doesnt have much of a knowledge regards correlation and interprets bullish setup in both EURUSD and USDCHF, and takes long position in both. Being unaware he is into virtual zero game.

My essential thought is that looking for near zero correlation will help in diversifying without having much to bother about the developments in other pair in which second position is assumed to be taken..

 

[GammaJammer]

To understand corellation, in the way that you are attempting, take a step back and examine the factors driving each currency. Then isolate what you need and strip out as much commonality as possible.

For example, examine cross correlations to stuff likie oil and gold. Examine sensitivity to rate differentials, examine how good pairs are as a proxy for global risk appetite (compare vs S+P 500 as a good if rough guide for this.

Maybe choose one currency pair from G10 and one from emerging market space.

So in summary - suggestions;

One USD based and one cross rate
One major, one e.m.
One a highly correlated risk trade, one less so
One sensitive to commodity markets, one not
One sensitive to rate differentials, one not.

That should put a bit of structure into it for you.

Of course, you could just keep trawling for correlations on the web, but this seems a hiding to nothing on several levels; You don't know what the quality of the underlying data is, you don't know the parameters used to calculate the correlation, you don't end up with an understanding of WHY stuff correlates or not and you end up no nearer having a handle on cause and effect (which are most decidedly NOT the same thing as correlation, a fact that LTCM found out to their cost in 1998 and half the world failed to learn from in the past two years).

My $0.02

GJ

 

[superfuego]

If you find the data in a csv with the same format as yahoo gives their historical data I'll try to calculate the correlation matrix for a given period for you. It's something I already have the code to do. At least I'm assuming that code still works, haven't touched it for a while.

I believe your interest in uncorrelated investment is fundamentally sound, it's why I calculated correlations for myself in the first place.

 

[Martinghoul]

There are statistical methods that can provide you insight into presence of a correlation/cointegration relationship between random variables. However, - and this is the case with most statistical techniques, - there are all sorts of caveats with these.

If you ask me, the only right way to do this would be to arm yourself with Excel and try to answer the question yourself, using your very own set of assumptions.

My Z$2c...

 

[GammaJammer]

would you reccomend non parametric measures for robustness' sake martin?? (dredging up pretty rusty stats knowledge now - I knew how to do all this stuff once.....)

 

[Technically Fundamental]

Where can you import the historic data into excel... I've been putting this off for too long.

 

[Martinghoul]

would you reccomend non parametric measures for robustness' sake martin?? (dredging up pretty rusty stats knowledge now - I knew how to do all this stuff once.....)

GJ, to be honest, I am not that much of a geek. Moreover, robustness comes at a price I am not really willing to pay.

 

[GammaJammer]

That's it. I quit. Nothing more to do now. I have reached the pinnacle.

A respectable hedge fund guy just called a spot trader 'a geek'. Seriously - I'm welling up here.

 

[Technically Fundamental]

How do I import you fags

 

[Jason Rogers]

DailyFX has a correlation matrix that is updated every month. Below is the link to the image and here is the site Shifts in Risk Appetite Alter Currency Correlations

 

[Martinghoul]

That's it. I quit. Nothing more to do now. I have reached the pinnacle.

A respectable hedge fund guy just called a spot trader 'a geek'. Seriously - I'm welling up here.

I must say that, now that you mention it, the irony is rather poignant. You should see me punting spot, though...

 

[Martinghoul]

How do I import you fags

Google, you macho heterosexual male...

 

[Rhody Trader]

How do I import you fags

CTRL+C, CTRL+V :cheesy:

 

[Technically Fundamental]

I was hoping you could direct me to a decent place but merci

 

[Martinghoul]

I was hoping you could direct me to a decent place but merci

Google does the directing a lot better... It came up with some FXHistory site, for one.

You should try Google, it's da bomb, y'know.

 

[GammaJammer]

I must say that, now that you mention it, the irony is rather poignant. You should see me punting spot, though...

Repeat after me.... "Oi - Ten yours Mark / Paris shaiiiig"