A Correlation Coefficient is a number between -1 and 1, gauging the degree to which two data sets are linearly related.

A correlation coefficient of 1 indicates that there is a perfect relationship between the two data sets. A correlation of -1 also indicates a perfect correlation, but that the two data sets move in opposite directions. (For example, EURUSD and USDCHF have a correlation of -0.95. The two currency pairs tend to move in opposite directions.)

The calculation for Correlation Coefficient is as follows,


Using spreadsheets software, simply insert the statistical function 'CORREL' for the two data sets.

1 indicate perfect positive correlation
0 indicates no correlation; the two data sets hold a random relationship.
-1 indicates perfect negative correlation; the two data sets tend to move in opposite directions.

Correlations Coefficients become useful in the foreign exchange market when traders embark upon positions in multiple currency pairs that tend to move in relation to each other. From the example above, when a trader longs EURUSD and also shorts USDCHF, they are essentially doubling up on the same position, since the two tend to move near perfectly in opposite directions. The trader may be better served if they are aware of such correlations.

For the most recent correlations report on thefx market, turn to the DailyFX Correlations report.