EUR & CHF: Correlations in Cash and Futures
Currency markets continue to witness the highly negative correlations between the EUR/USD and USD/CHF exchange rates (one goes up, the other nearly always goes down and vice versa). A product of the dollar’s similar rate of change vis-a-vis the euro and the Swiss franc, this relation has continued to hold much before and after the September 11 attacks, when the Swiss franc’s safe haven status was firmly re-established.
More importantly, an almost perfectly inverse relation between the EUR/USD and USD/CHF does not necessarily imply a similar performance of the dollar against the franc and the euro. As we have identified in previous studies, it took the US dollar 37 days to recover all of its losses incurred against the euro after September 11, breaking even on October 19, 2001. But it took the US dollar 103 days to properly recover all of its post September 11 losses against the Swiss franc, starting to gain on December 24, 2001. This suggests that while the dollar’s behavior against both currencies may be similar in direction, it is far from different in magnitude. The differential in magnitude explains the time lag of the dollar’s behavior vs the franc behind that of its performance against the euro.
In each of the past 24 months, the daily correlations have shown a consistently negative fit (lowest at –0.83, highest –0.99). The relation is equally strong for daily correlations on a weekly basis. This means that the other pair almost always reverses the direction in one pair on a given day.
Yet those wishing to capitalize on this correlation on a shorter-term basis, such as an intra-day horizon, the correlation is far less consistent. The chart below shows the correlations of the 2-hour prices between EUR/USD and USD/CHF for January-March 2002. The average correlation is –0.54, a much weaker correlation than that illustrated in the daily performance. This means that a 2-hour time bracket is far too short for the correlation to play out i.e. for one pair to reverse the other pair’s direction. Traders, who aim at hedging their EUR/USD or USD/CHF positions, could open a reverse position in USD/CHF or EUR/USD that can help reduce exposure given at least half a day’s session has elapsed.
Meanwhile, in the futures market, no discernable correlation is found between EUR/USD and USD/CHF speculative futures contracts, as seen by weekly traders’ commitment reports at the International Monetary Market. The charts below show traders’ net euro positions are unrelated to traders’ net Swiss franc positions. Also, the closeness between the spot exchange rate and net future positions varies from one cycle to another. Speculators have been net buyers of euro futures contracts since November of last year, but the euro had mainly floundered from 90 cents to 88 cents. Meanwhile, Swiss franc speculators have predominantly shorted the currency since late December to little avail to the currency.
- April 2, 2002
More importantly, an almost perfectly inverse relation between the EUR/USD and USD/CHF does not necessarily imply a similar performance of the dollar against the franc and the euro. As we have identified in previous studies, it took the US dollar 37 days to recover all of its losses incurred against the euro after September 11, breaking even on October 19, 2001. But it took the US dollar 103 days to properly recover all of its post September 11 losses against the Swiss franc, starting to gain on December 24, 2001. This suggests that while the dollar’s behavior against both currencies may be similar in direction, it is far from different in magnitude. The differential in magnitude explains the time lag of the dollar’s behavior vs the franc behind that of its performance against the euro.
In each of the past 24 months, the daily correlations have shown a consistently negative fit (lowest at –0.83, highest –0.99). The relation is equally strong for daily correlations on a weekly basis. This means that the other pair almost always reverses the direction in one pair on a given day.
Yet those wishing to capitalize on this correlation on a shorter-term basis, such as an intra-day horizon, the correlation is far less consistent. The chart below shows the correlations of the 2-hour prices between EUR/USD and USD/CHF for January-March 2002. The average correlation is –0.54, a much weaker correlation than that illustrated in the daily performance. This means that a 2-hour time bracket is far too short for the correlation to play out i.e. for one pair to reverse the other pair’s direction. Traders, who aim at hedging their EUR/USD or USD/CHF positions, could open a reverse position in USD/CHF or EUR/USD that can help reduce exposure given at least half a day’s session has elapsed.
Meanwhile, in the futures market, no discernable correlation is found between EUR/USD and USD/CHF speculative futures contracts, as seen by weekly traders’ commitment reports at the International Monetary Market. The charts below show traders’ net euro positions are unrelated to traders’ net Swiss franc positions. Also, the closeness between the spot exchange rate and net future positions varies from one cycle to another. Speculators have been net buyers of euro futures contracts since November of last year, but the euro had mainly floundered from 90 cents to 88 cents. Meanwhile, Swiss franc speculators have predominantly shorted the currency since late December to little avail to the currency.
- April 2, 2002
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