Currency pairs in the Netherlands are two currencies that are traded together.
Firstly you have the base currency. Secondly, you have the quote currency.
The value of a currency pair will change as one of the currencies fluctuates relative to the other.
When you see a pair like EUR/USD, this means that for every 1 Euro someone sells; they will buy 1.0000 US dollars.
Conversely, for every 1 US dollar someone buys, they will sell 0.9268 Euros. When someone buys Euros, they are essentially selling US dollars simultaneously. And when someone sells Euros, they are accepting US dollars.
The EUR/USD currency pair is “purchasing power parity” (PPP) because it takes 1 Euro to purchase the same amount of goods and services in the US as it does in Europe.
This isn’t always true, but it’s a good general rule of thumb. Currency pairs can be correlated in different ways. In the example above, we have a positive correlation because when the EUR goes up, the USD goes up. This is called a “positive correlation.”
A positive correlation means that when one currency goes up, the other currency tends to go up as well. A negative correlation means that the other currency tends to go down when one money goes up.
What is meant by currency pairs correlation in the Netherlands?
Two currencies whose prices relative to one another move in a similar direction are correlated.
For example, when the price of the Euro rises against the US Dollar, the cost of the British Pound may also rise against the US Dollar.
However, that isn’t guaranteed and depends on other factors too. Currency pairs correlation is also known as “Paired correlation”.
When two currency prices move closely enough about one another, we can say that they are correlated or have a coefficient of correlation between them.
If two price series are perfectly positively correlated, their coefficients would be 1.0. Ideally, negatively correlated coefficients would be -1.0.
The closer the coefficient is to either of these values, the stronger the correlation between the two series.
Factors that affect currency pair correlation
Several factors can affect currency pairs correlation in the Netherlands, including but not limited to:
- Interest rates differential
- Inflation rates differential
- Terms of trade
- Political stability
- Economic growth rates differential
The level of correlation between different currency pairs changes over time and can also differ from country to country.
For example, the Euro and Japanese Yen might have a higher correlation in Germany than France.
Currency traders use correlations as one tool amongst many to help them decide when to buy or sell a currency pair.
A higher coefficient between two currency pairs might indicate that one of those currencies is being bought because it is seen as a good investment relative to the other.
One may make a common assumption that if the Euro goes up against the US Dollar, the British Pound will also go up against the US Dollar.
However, if traders believe that this may not happen, they will sell GBP/USD and buy EUR/USD to profit on this transaction – if not in themselves, then at least someone else.
In Summary
The level of correlation between different currency pairs changes over time and can also differ from country to country.
For example, we might see a higher correlation between the Euro and Japanese Yen because these two currencies are commonly used in international trade.
Currency traders use correlations as one tool amongst many to help them decide when to buy or sell a currency pair.
While it’s not advisable to make blind assumptions about what will happen next, understanding the relationship between different currency pairs can help decide where to invest your money. A trusted Saxo broker can help you to work with currency pairs correlation.
