What are the Best Times to Trade Forex in Singapore?
The best time to trade forex in Singapore is between 9 and 12 PM in the evening, as the London and New York markets overlap, creating the best trading conditions.
Forex pair correlation refers to a relationship between certain currency pairs. When traders know how currency pairs move in relation to each other, it is easier to anticipate their moves, making this information valuable for managing risk, diversifying portfolios, and making more informed trading decisions.
Because the global economy is so intertwined, significant events in one country can have a ripple effect and change the value of some other currency, even if it is halfway across the world. Such implications are always present with strong foreign trade relations.
Correlation is measured using a coefficient that ranges from -1 to 1. A value of +1 indicates a perfect positive correlation, where two currency pairs move in the same direction. A value of -1 indicates a perfect negative correlation, meaning that as one pair moves up, the other moves down. A correlation value of 0 suggests no discernible relationship between the movements of the two pairs.
The three types of forex correlation and the basic reasoning behind it are the following:
A positive correlation between two forex pairs means they move in the same direction. This correlation is common for pairs with the same economic influences or geographical proximity. For example, economic ties between Australia and New Zealand are so strong that AUD/USD and NZD/USD often exhibit a strong positive correlation.
If the Australian Dollar strengthens against the U.S. Dollar, the New Zealand Dollar will likely follow suit.
This correlation exists when two currency pairs move in opposite directions. EUR/USD and USD/JPY are examples of such a situation. When the Euro strengthens against the U.S. dollar, the Japanese yen may weaken, causing a divergence in their movement.
Negative correlation often helps traders with hedging, reducing the risk of losses in volatile market conditions.
Some currency pairs show little to no correlation, meaning their price movements are independent. These pairs typically involve currencies from different economic regions or markets with minimal overlap. For example, EUR/USD and USD/CAD may show no correlation at times, as they are driven by different factors, including European and Canadian economic policies.
This information is still valuable for risk management. Knowing when there is no correlation allows traders to manage their portfolios better.
Several factors can influence the correlation between currency pairs, making it important for traders to stay updated on global events and economic data.
Macroeconomic indicators such as Gross Domestic Product (GDP), inflation rates, and interest rates can significantly impact currency correlations. When two countries have similar economic conditions, their currencies may move together, leading to a positive correlation.
Conversely, diverging monetary policies can lead to a negative correlation. For example, the Bank of England hiking the interest rate while the Bank of Japan cutting the interest rate will lead to an opposite movement in the British pound and the Japanese yen.
Market sentiment also plays a crucial role in shaping currency correlations. During periods of market risk aversion, investors flock to safe-haven currencies like the U.S. dollar or the Japanese yen, causing pairs involving these currencies to move in tandem.
However, when market sentiment is optimistic, riskier currencies such as the Australian dollar or New Zealand dollar may strengthen, affecting their correlations with other pairs.
Commodity-producing countries such as Australia or Canada will have the value of their currency directly correlated with specific commodity prices. For example, if iron ore weakens, it will influence the Australian dollar, while a rise in oil prices would boost the Canadian dollar or the Saudi Arabian riyal.
Tracking currency correlations offers several advantages to traders.
One of the main benefits of understanding forex correlations is portfolio diversification. Trading uncorrelated or negatively correlated pairs allows traders to spread risk, minimizing the impact of losses from a single trade. By avoiding excessive exposure to one currency, traders can maintain a more balanced and resilient portfolio.
Hedging is a popular strategy among forex traders, and using negatively correlated pairs is a key component. If a trader holds a long position in EUR/USD, they may take a short position in USD/JPY to offset potential losses. This reduces the impact of market fluctuations and protects capital from sharp price movements.
Currency correlations can help traders spot potential trading opportunities. For example, if two positively correlated pairs, like AUD/USD and NZD/USD, begin to diverge, it may signal a trading opportunity where one of the pairs could soon align with the other. Traders can also use historical correlation patterns to predict future price movements, increasing the likelihood of profitable trades.
The following groups belong to commonly correlated forex pairs.
Currencies from countries rich in natural resources often correlate strongly with commodity prices. For instance, the Australian dollar (AUD), Canadian dollar (CAD), New Zealand dollar (NZD), and Norwegian krone (NOK) are closely linked to commodities like gold, oil, and natural gas. When commodity prices rise, these currencies tend to appreciate as well.
The euro (EUR), British pound (GBP), and Swiss franc (CHF) tend to show correlations due to Europe's intertwined economies. Economic policies from the European Central Bank or political events within the European Union can impact these currencies similarly.
In the Asia-Pacific region, currencies such as the Japanese yen (JPY), Singapore dollar (SGD), and Hong Kong dollar (HKD) often move together. This is due to the regional economic ties and similar market influences, including trade relationships and investor sentiment.
Gold, a precious metal, plays a significant role in the global economy, particularly during periods of economic uncertainty. It often has strong correlations with certain currencies – either due to commodity production, or central bank’s gold reserves, making it a consideration in forex trading strategies.
Gold is positively correlated with several commodity-linked currencies, most notably the Australian dollar (AUD) and the Canadian dollar (CAD). Australia is one of the largest gold producers globally, and the Australian dollar often moves in tandem with gold prices.
Similarly, the Canadian dollar, while more directly influenced by oil, also shows some correlation with gold due to Canada's substantial mining industry. When gold prices rise, traders may see the AUD and CAD strengthen as well.
Gold typically has a negative correlation with the U.S. dollar. Gold prices tend to rise when the U.S. dollar weakens, and vice versa. This relationship exists because gold is priced in U.S. dollars; when the dollar depreciates, gold becomes cheaper for investors holding other currencies, driving up demand and price. Traders focusing on U.S. dollar movements can use this correlation to inform their gold trading strategies or hedge against dollar fluctuations.
Gold is often considered a "safe-haven" asset, similar to the Japanese yen and Swiss franc, during economic turmoil or market volatility. When market sentiment shifts toward risk aversion, traders may see correlations between gold, the yen, and the franc strengthen.
The three following approaches can help implement correlation into trading strategies.
Pair trading involves buying and selling two correlated currency pairs simultaneously to profit from price convergence. For example, if AUD/USD and NZD/USD show a strong positive correlation, a trader might buy the underperforming pair and sell the outperforming one, expecting the two pairs to realign.
Basket trading involves creating a portfolio of multiple correlated pairs to spread risk and capture potential returns. By selecting pairs with positive or negative correlations, traders can build a diversified portfolio that reduces the impact of any one pair's volatility, minimizing the risk of an unforeseen event influencing the trade.
Arbitrage opportunities arise when correlated pairs temporarily deviate from their typical relationship. Traders can exploit these price discrepancies by buying one pair and selling the other, profiting as the prices return to their usual correlation.
Despite valuable information, there are a few important things to consider regarding forex correlations.
It's essential to remember that correlation does not imply causation. Just because two currency pairs move in the same direction does not mean that one pair's movement causes the other's. External factors, such as economic data or geopolitical events, can influence correlations.
Currency correlations are dynamic and can change over time. A pair that has been strongly correlated in the past may weaken or strengthen its correlation based on new economic conditions, market sentiment, or political developments. Traders need to monitor correlations regularly and adjust their strategies accordingly.
Regardless of the correlation strategy employed, effective risk management is crucial. Correlations can be unpredictable, and over-reliance on them without proper stop-loss orders or position sizing can lead to significant losses.
Correlation coefficients measure the degree of correlation ranging from -1.0 to +1.0. A +1 correlation implies that two pairs always move 100% in the same direction, while -1 implies the opposite. A reading of 0 means a perfectly neutral correlation.
USD/SGD has a very strong positive correlation with USD/THB and USD/ZAR. It strongly correlates negatively with SGD/HKD, ZAR/JPY, and NOK/SEK.
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