Some currency pairs tend to move together in the same direction. Other currency pairs tend to move in opposite directions. Understanding how currency pairs tend to move relative to one another can be used in a number of different ways. It can be used to analyze how diversified your Forex portfolio is and, indirectly, your risk profile. It can also be used to understand how to enter into hedging trades.

Currency correlations measure how closely currency pair prices have (statistically) moved together in the past. A correlation coefficient, a number between -1 and +1, is used to express how closely correlated two pairs are. For example, if GBP/USD and EUR/USD have a correlation coefficient of over 0.80, then the two pairs are said to be highly correlated: if GBP/USD goes up, then EUR/USD will tend to go up as well. As a result, adding a GBP/USD position to a EUR/USD position will extend your exposure and won't be effective in diversifying your portfolio. On the other hand, EUR/USD and USD/CHF will tend to have a correlation coefficient below -0.80, which means that if EUR/USD goes up, USD/CHF will tend to go down. Hence, USD/CHF can be used to hedge a EUR/USD position. Finally, if two pairs have a correlation coefficient close to 0 then the two pairs tend to move independently of one another.

It is important to note that currency correlations can change over time because of changes in monetary policies or shifts in the eco-political landscape. For example, a new extensive free trade agreement between two countries may mean that their currencies will correlate more strongly in the future. Traders will want to analyze changes in correlations since such changes affect their risk profiles.