How EUR/USD traders can use the USD/CHF correlation in 2016

December 23, 2015 09:33 AM

As we noted early on Tuesday, there’s not much hitting the wires in terms of actionable economic news (beyond the slight negative, but still better-than-expected revision to Q3 US GDP data), so we wanted to revisit one of the forex market’s strongest correlations: the relationship betweeneuro/dollar and dollar/Swiss franc currencies pairs.

One of the most common problems I see from newer forex traders is that many of them analyze the Swiss franc in isolation. Even though the Swiss National Bank officially ended the EUR/CHF floor back in January, trade in the franc is still driven predominantly by flows in the euro. That’s because the Swiss economy is still heavily dependent on its neighbors to the east (and west and north and south)… in other words, the Eurozone. It’s worth noting here that the Eurozone’s economy (~ $13T USD) is nearly 20 times larger than that of Switzerland ($685B USD), and traders tend to lump these two currencies together under the umbrella of “European currencies.”

To add some meat to the discussion, the current 50-day correlation between EUR/USD and USD/CHF is -0.97, amazingly close to the 1.0 figure that would signal that the two instruments move in lockstep. For more visual traders, I’ve plotted chart of the EUR/USD vs. CHF/USD (inverted version of the USD/CHF):

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.