Why correlation of EURUSD and USDCHF is usually high?

[OddTrader]

Now I can remember a reading long time ago about:

1. The banks in Switzerland own a lot of USD deposited by wealthy foreigners. This produces very high correlation.

2. People owning US dollars will switch/convert USD to Switzerland as CHF if USD is getting weak/ strong. This makes negatively correlated.

Comments?

 

[hcour]

Now I can remember a reading long time ago about:
1. The banks in Switzerland own a lot of USD deposited by wealthy foreigners. This produces very high correlation.
2. People owning US dollars will switch/convert USD to Switzerland as CHF if USD is getting weak/ strong. This makes negatively correlated.
Comments?

In Kathy Lien's book "Daytrading the Currency Market" she says that the CHF is correlated w/Gold (according to CSI, +77 the last 10 yrs) while Gold is inversely correlated to the Dollar (CSI, -73 last 10 yrs). She also writes:

The Swiss Franc moves primarily on external events rather than domestic economic conditions. This is due to its political neutrality, the franc is considered the world's premier safe-haven currency. Therefore, in times of global instability and/or uncertainty, investors tend to be more concerned with capital retention than appreciation. At such times, funds will flow into Switzerland...

Good stuff. She does a great job analyzing the specific forces that drive each major currency.

H

 

[OddTrader]

Quote from hcour:

In Kathy Lien's book "Daytrading the Currency Market" she says that the CHF is correlated w/Gold (according to CSI, +77 the last 10 yrs) while Gold is inversely correlated to the Dollar (CSI, -73 last 10 yrs). She also writes:

The Swiss Franc moves primarily on external events rather than domestic economic conditions. This is due to its political neutrality, the franc is considered the world's premier safe-haven currency. Therefore, in times of global instability and/or uncertainty, investors tend to more concerned with capital retention than appreciation. At such times, funds will flow into Switzerland...

Good stuff. She does a great job analyzing the specifics of each major currency.

H

Many thanks. That probably should be quite reasonable fundamanetal reasons, besides other technical trading issues.

 

[late apex]

Quote from hcour:

Hi late apex,

Could you explain further? Because I too thought the obvious answer was /USD vs USD/. According to the CSI correlation reports, the EUR & CHF (futures) are highly positively correlated to each other (90% or greater) and both are highly inversely correlated to the USD (90% or greater).

Isn't the "quoting convention" that you refer to exactly what the respondent you quoted was referring to? If it was EUR/USD and CHF/USD, would they not be highly positively correlated? What am I missing in your explanation?

Thanks,
Harold

Sure. The post to which I replied was, in its entirety:

It is nearly 100% due to the fact they trade the dollar inversely. Both of them being Euro-zone currencies helps contribute in a secondary way.

I replied "That is incorrect", referring to both sentences.

The "both in Eurozone" factor explains the "highly correlated" (here "nearly 100%") part of the OP's question -- but in a major, not secondary / contributing way.

The "inverse" factor -- direct vs. indirect quoting convention, in dollar terms -- helps explain only the "inversely" (negatively signed) part of the OP's question, and nothing else. It has nothing to do with the nearly 100%, highly correlated part.

In general, as mentioned, the direct vs. indirect quoting convention helps determine only the sign of the correlation between any two pairs (more likely to be negative over time), not its degree / magnitude (how weak or strong it's going to be). Many oppositely quoted pairs are weakly correlated, well under 50% in absolute value. For example, over the last 100 days, GBP/USD correlations with USD/CHF, USD/JPY, USD/CAD and USD/ZAR are -0.12, 0.14, -0.27, -0.01, respectively.