As I mostly hear about the 6 majors I was wondering how correlated they are positively or negatively. Is it truly diversification to trade them all?
The correlation vs the $ is above 50 for most of the major pairs most of the time. So going long/short the $ vs multiple currencies isn't going to help much from a diversification standpoint. Spread bets are the best option for risk control. The one exception to this is the Yen lately. I guess because the MOF has put a cieling on its appreciation. I haven't studied cross pairs much but I would guess the results would be pretty close.
Thanks for the reply. So are you saying that if one of the majors goes up then most of the rest are relatively strongly up or down in correlation?
yes, .5 is on the low end. most are between .7 and 1. However, I think these tend to change if a country experiences a local crises (i.e. an earthquake) so you would have some risk protection. I am not sure about emerging markets but I would bet you would get diversification benefits there.
Many thanks TLCAP. Some questions are so specific you hope there is just one person out there who knows the answer. I'm building a short premium options model for fx and this is valuable info in applying it to the 6 majors.
http://www.fxtrek.com/universityEN/risk_management.asp Q In the FX world, we often compute the of one currency rate with respect to another currency rate. For example, over the period of 2/24/2001 to 5/24/2001, GBP/USD and EUR/USD have a of 0.88, and it means that the two currency rates are strongly positively correlated. UQ I suppose we need to observe and compare their correlations based on historical and current data/charts. I wonder very much we can apply a constant (say 0.88) for all times during different periods.
based on my quick research it does vary over time but rarely drops below .5 for example, EUR/USD, AUD/USD have a corr. of .951 over the last year but it's only .716 over the last 3 months. I would love to see numbers on emerging market correlations if anybody has any info.