Correlation Analysis
Below are highlights from correlation analysis using market and economic data from sources such as IMF, OECD and World Bank. The AUDGBP, CADGBP, CHFGBP, EURGBP, JPYGBP and USDGBP Foreign Exchange Rates were chosen for this analysis because these currencies are the most commonly held in the UK.
Correlations were calculated using the percentage change over periods.
The examples selected had the strongest correlations in my analysis. It is very difficult to find relationships between economic data and changes in FX rates. Many movements in FX rates appear random. With this in mind, I believe that SMEs and individuals holding a portfolio of foreign currencies should manage their FX Risk exposure by using a Value at Risk (VaR) model using the historical simulation method (with over 15 years of FX rate data).
Summary of findings:
1. Moderate positive correlation between currencies. These positive correlations (AUDGDP with NZDGDP, CADGDP with USDGDP and CHFGDP with EURGDP) highlight the close integration of these economies. In fact the Swiss Franc (CHF) was often more sensitive to German and French economic data than the Euro.
2. UK and US Long Term Interest Rates (OECD) have moderate negative correlation with JPYGBP.1 Investors buy Japanese assets when yields fall in UK/US assets.
3. US GBP (PPP) (World Bank) has strong negative correlation with JPYGBP.2 Investors buy Japanese assets when they are not confident about US Economic Growth.
4. Energy Supply (MLN_TOE) (OECD) has negative correlation with CHFGBP, EURGBP and USDGBP.3 Supply of energy appears to lead to currency depreciations. Will these correlations change as we move to cleaner energy sources?
5. G20 Oil Production (OECD) has strong negative correlation with CHFGBP and EURGBP.4 The CHF and EUR appear to depreciate when demand for oil is high.
6. German Inland Freight (OECD) has negative correlation with CHFGBP and EURGBP.5 Is German consumption responding the changes in the Euro?
7. German Industry as % of GDP (World Bank) has strong negative correlation with CHFGBP and EURGBP.6Is German industry boosted by depreciations in EUR.
8. Chinese Industry as % of GDP (World Bank) has moderate positive correlation with AUDGBP, CADGBP and NZDGBP.7China's investment in infrastructure projects led to appreciations in the AUD, CAD and NZD.
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1. [OECD (2020), Long-term interest rates (indicator). doi: 10.1787/662d712c-en (Accessed on 06 September 2020)]↩ 2. [The World Bank (2020), World Development Indicators - GDP, PPP(current international $), (Accessed on September 2020)]↩ 3. [OECD (2020), "Primary energy supply" (indicator), https://doi.org/10.1787/1b33c15a-en (accessed on 07 September 2020)]↩ 4. [OECD (2020), Crude oil production (indicator). doi: 10.1787/4747b431-en (Accessed on 07 September 2020)]↩ 5. [OECD (2020), Freight transport (indicator). doi: 10.1787/708eda32-en (Accessed on 07 September 2020)]↩ 6. [The World Bank (2020), Industry (including Construction), value added (% of GDP), CC BY-4.0, (Accessed on September 2020)]↩ 7. [Ibid.]↩