Currency correlations and combined exposure
Look beyond individual trades to understand shared currency and market risks.
What correlation measures
Correlation describes how two data series have moved together over a specified sample. Positive correlation indicates a tendency to move in the same direction; negative correlation indicates the opposite. A value near zero does not establish independence or absence of risk.
For market analysis, the chosen return interval, sample length and data quality matter. A correlation calculated from daily returns over a year can differ from one calculated from hourly returns over a week.
Two trades can share the same risk
A long EUR/USD position and a long GBP/USD position both contain short US-dollar exposure. They are separate instruments, but an event affecting the dollar may move both. The size of the combined exposure depends on their notionals and currency values.
This does not mean the positions always move together or that the risk is automatically exactly doubled. Changes in euro- or sterling-specific conditions can affect them differently.
Do not treat a correlation table as a hedge guarantee
Relationships can change during market stress, policy shifts or liquidity shortages. An offsetting position may also introduce spread, financing, execution and basis risks.
Review what each position is exposed to: currencies, economic releases, regions, sectors and funding conditions. Counting symbols is not the same as measuring diversification.
Use analysis to make the plan explicit
Record the data window and assumptions when comparing instruments. Examine scenarios in which historical relationships weaken, reverse or become stronger.
If a strategy depends on a pair relationship, evaluate it with costs and on data outside the development sample. Combining indicators or adding more correlated positions does not by itself improve the probability of success.
Questions for your position review
- Which currency or event could affect several positions at once?
- How large is each exposure in a common account currency?
- What happens if the apparent hedge stops offsetting losses?
- Are costs and margin requirements included?
- What would cause you to reduce or close the combined exposure?
Further reading
This guide explains concepts and ways to organise your research. It is not a recommendation to trade, a personal allocation plan or a promise of returns. Read the Terms of Business and your account conditions.