Thursday, October 8, 2009

Foreign Currency ETFs Correlations: How to Properly Diversify From the U.S. Dollar

We continue our studies of current correlations by examining the relationships among all currency ETFs on the market and gold (through GLD). Correlations are extremely important for investing, even more so as investors, specially retired people and seniors, try to protect themselves from further drops in the U.S. dollar. These currency ETFs are very easy to buy. Make sure you know when to buy and sell though, as we post the RSIs here regularly. Many of thse RSIs are stratospheric in light of the recent near-collapse of the U.S.Dollar.

Here is the correlations table for Q3 2009. Please click to enlarge, it is a large image.

The cells shaded in green are highly correlated (over 0.85), while the cells in red are highly inversely correlated (<-0.85). We see that many currencies are highly correlated (over 0.95), for example: FXA BNZ BZF CEW DBV FXF EU FXS DBV UDN and EU (dollar down and Euro): 0.96! At the same time, the Euro is highly inversely correlated wiht the New Zealand and Australian dollars. Correlations Between Currencies and with Gold

We found that gold is highly correlated with many currencies:


In order to properly diversify his or hers currency holdings, an investor would need to make sure that the currencies are not correlated. This means correlations value somewhere between -0.5 and +0.5, ideally, even lower absolute values. A zero would be perfect.

For example, based on this data, holding both Brazilian real and Australian Dollar is redundant and not a good idea.

Similarly, buying dollar down ETF and the Euro has been very redundant.

Note: You may receive technical analysis and alerts of these currency ETFs by entering the symbols in the great Technical Trend Analysis Tool, (powered by INO).

For your reference, here are the names of the ETFs:

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Paul said...

This is an extremely useful chart. I just started paper trading forex and realize this in the back of my head but haven't gotten around to work out the correlations yet. Thanks for saving me hours of work!


Deming said...


Thanks for the chart!


The Shocked Investor said...

Thank you, I am very happy you find it useful.

Devid said...
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